Public sector fuel retailers will be in a position to take a call on resuming the daily revision of petrol and diesel prices once international crude oil prices stabilise under $80 per barrel, according to senior industry officials. As international oil and fuel prices continue to remain highly volatile, the companies are exercising caution as they do not want to pass on the price volatility to consumers, a top official with one of the three companies said.
The three companies — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) — have not revised pump prices at their end since early April of last year, when global crude oil and fuel prices had surged in the aftermath of Russia’s invasion of Ukraine. The primary objective of halting fuel price revisions was to shield the Indian economy from skyrocketing energy prices globally. A jump in fuel prices would have led to significantly higher inflation in India, as was seen in countries that did allow a pass-through of high energy prices.
As per the pricing methodology that these oil marketing companies (OMCs) are supposed to follow, petrol and diesel prices should be revised daily based on the 15-day rolling average of international benchmark prices. As India depends on oil imports to meet over 85 per cent of its domestic requirement, fuel prices in the country are linked to prices in the international market. The three OMCs together have a market share of over 90 per cent in retail sales of petrol and diesel, which allows them to wield the pricing power. They are usually aligned on retail prices of major fuels.
Although international oil prices have corrected substantially from the peak levels of last year, they continue to remain volatile. Global benchmark Brent crude is currently trading around $84 per barrel. At this year’s peak in September, it had touched $97 per barrel. Given the current scenario, $80 per barrel “on a sustained basis” is the level with which the OMCs would be comfortable to consider daily price changes, the official quoted above said on the condition of anonymity. According to industry insiders, given the current pump prices and margins on the two automobile fuels in the international market, an oil price level of under $80 would ensure that the OMCs would not have to bear any under-recovery on fuel sales.
After incurring heavy under-recoveries for much of last year, the OMCs were in the process of recouping their accumulated losses from 2022-23 (FY23) in the current financial year. There were indications from the government and the OMCs that they would revert to daily price revisions once last year’s accumulated losses were recouped. However, according to another senior OMC official, the losses are yet to be fully recouped.
It is worth noting that while these companies are making a profit on petrol sales and have registered robust earnings in the refining segment as well, they are not fully out of the woods in the case of diesel sales. “On some days there is profit on diesel but on other days there is loss. There is no consistent trend,” the second official said.
As election season is already underway with Assembly polls in five states, and the Lok Sabha elections are just a few months away, analysts and industry insiders say it is highly unlikely that OMCs would hike prices of diesel and petrol. A price reduction in the near future is also being seen as only a distant possibility, given the volatility in global oil and fuel markets and prices.
In such a scenario, fuel price cut can only be achieved if the government cuts taxes on the petrol and diesel, like it did on two occasions over the past couple of years, or the OMCs decide to bear deeper losses at the government’s behest.
Last month, Moody’s Investors Service noted that the OMCs’ marketing margins — the difference between their net realised prices and international prices — had weakened significantly from the highs of April-June. “Marketing margins on diesel turned negative since August while margins on petrol have narrowed considerably over the same period as international prices increased,” it said, adding that elevated oil prices leave the OMCs little room to pass on the higher cost to consumers in view of the impending 2024 Lok Sabha elections.