Several OMC officials and executives who FE spoke to said the government might wait for another fortnight before taking a decision on retail fuel rates, given the fluid geopolitical situation and the threat it poses to macro-economic indicators.
Even as the three public oil marketing companies’ (OMCs) under-recoveries from retail sales of auto fuels have been rising steadily since the virtual freeze on prices imposed on November 4 last year, and they are staring at considerable losses in the March quarter, these firms may not hurry to hike prices. Even though Assembly elections to five states, which are believed to have caused the price freeze, are over, rising inflation may prompt the government not to give its tacit nod to the OMCs to adjust retail rates to their rising costs.
Several OMC officials and executives who FE spoke to said the government might wait for another fortnight before taking a decision on retail fuel rates, given the fluid geopolitical situation and the threat it poses to macro-economic indicators.
Even as retail fuel prices remained unchanged, fuel and light inflation, as measured via the consumer price index (CPI), remained elevated in February at 8.73%. Retail inflation stood at eight-month peak of 6.07% in February, having hit the upper band of the Reserve Bank of India’s (RBI) medium-term target of 2-6% for a second straight month.
It is clear from the wholesale price index (WPI) for fuel and power, which remained as high as 31.50% in February, that if the retail rates were in sync with the rise in Indian basket of crude, retail fuel inflation would have been much higher and pushed the overall inflation to still higher levels. Of course, even though petrol and diesel prices were on hold, the February retail inflation figures captured a rise in prices of naphtha, fuel oil and ATF.
Of course, inventory gains and relatively high refining margins helped the OMCs to absorb the under-recoveries from retail sales to an extent, but these gains are quickly petering out. The flurry of economic sanctions against Russia by the US and its Western allies have led to supply shocks and global inflationary pressures.
“Given the way the Ukraine crisis is unfolding, its course is unpredictable. The entire scenario may improve suddenly and the prices may even go back to the level before the war erupted. So there is every possibility that government will wait for things to improve instead of opting for a knee-jerk reaction,” a top OMC official said.
Another official said that government would indeed weigh the inflation risks that accompany increase in auto fuel prices. The government, he said, was apparently waiting for solutions to emerge in terms of ceasefire, increase in OPEC+ led productions or easing of sanctions on Iran, he added.
“I believe when the geopolitical situation eases, one can expect the crude prices to soften and settle at around $100 barrel mark. While the price hikes would still be necessary, it would be less steep and would be more manageable from the macro-economic point of view,” R Ramachandran, former director-refineries at BPCL said.
The inability of OMCs to pass on the costs reflects their lack of autonomy, a Mumbai-based analyst, who doesn’t want to be identified, said, adding that if the situation continues, the valuation multiples of OMCs might return to the levels when fuel prices were formally regulated.
Probal Sen, oil & gas analyst with ICICI securities, said assuming normal run rates of volumes, the three state-run OMCs might incur combined Ebitda loss of Rs 9,200 crore from these two fuels for the current quarter. The OMCs under recoveries in marketing margins for the last 15 days have been Rs 10-12 per litre.
The benchmark gross refining margins (GRMs), however, have recovered sharply quarter-on-quarter, which will benefit the OMCs.
“Given the sharply higher crude prices, inventory gains could be as high as $12-15/bbl for the quarter, hence reported GRMS for IOCL/BPCL/HPCL could be 30-50% higher qoq vs Q3FY22 actuals of $9.7/12/6.4 per bbl respectively,” Sen said.
