Auto fuel prices in India have remained unchanged since November 4, 2021, despite crude oil prices averaging around $111/barrel (bbl) in the first three weeks of March 2022 compared to around $82/bbl in early November.
State-run fuel retailers IOC, BPCL and HPCL have together lost around $2.25 billion (Rs 17,000 crore) in revenue between November and March third week by keeping petrol and diesel prices unchanged despite a sharp rise in crude oil prices, Moody’s Investors Service said on Thursday.
Auto fuel prices in India have remained unchanged since November 4, 2021, despite crude oil prices averaging around $111/barrel (bbl) in the first three weeks of March 2022 compared to around $82/bbl in early November.
“This implies that the costs for the state-owned refining and marketing companies are currently higher by around $29/bbl without any corresponding increase in revenue. Based on current market prices, the oil marketing companies are currently incurring a revenue loss of around $25/bbl and $24/ bbl on sale of petrol and diesel, respectively,” Moody’s said.
Even though OMCs’ revenue losses from auto fuel sales during the price-freeze period are high, the losses are seen to have been offset to a large extent by the high gross refining margins enjoyed by them in the current quarter. Abhishek Datta, oil and gas analyst with Prabhudas Lilladher, said: “For Q4FY22, despite marketing losses, we expect OMCs to make profits of Rs 17,200 crore against Rs 9,200 crore in the previous quarter on the back of strong GRMs and inventory gains of `22,500 crore.”
Of course, the high GRMs, enabled by a steep rise in inventory gains, might fizzle out through Q1FY23 due to the high prices at which crude is now being sourced and going to be sourced in the weeks to come. Gradual retail price increases would therefore be needed over many weeks to bridge the gap between cost of crude and realisations from auto fuel sales.
DK Srivastava, chief policy advisor, EY India, said, “The ongoing pressure on the Indian crude basket due to the global developments will have adverse growth and inflation effects. Our estimates for FY23 suggest that if the price of the Indian crude basket increases by $25/bbl with reference to a baseline of $75/bbl, growth may fall by about 70 basis points and CPI inflation may increase by 100 basis points.”
The RBI professional forecaster’s survey had projected a CPI inflation range of 4.4-6% for FY23. This looks an under-estimate now. Srivasatava notes that given recent CPI inflation trends, the likelihood of reaching the upper level of this range seemed strong even before the current global crisis.
If crude oil prices continue to average around $111/bbl, IOC, BPCL and HPCL will incur a combined daily loss of around $65-70 million on the sale of petrol and diesel unless fuel prices are increased to cover the rising crude oil prices, Moody’s said. The estimated loss of $2.25-billion revenue by these three fuel retailers equates to around 20% of the combined FY21 Ebitda (earnings before interest, taxes, depreciation and amortisation) for the these entities.
The rating agency estimated that IOC’s revenue loss to be around $1-1.1 billion while that of BPCL and HPCL to be about $550-650 million each over the same period.
“This loss in revenue will add to the short-term borrowings, funded with working capital lines, of the refiners until such time that crude oil prices stay at elevated levels. Over time, the companies might be able to make up for some of these losses if oil prices come down,” it added. “We do expect that the government will allow the refiners to adjust prices appropriately and avoid a situation where refiners continue to make losses of this magnitude for a prolonged period,” it said.
Commenting on the two days of price increase, Moody’s said this underpins the expectation that the price increases will be gradual and occur over a period of time rather than being a one-time adjustment. “Until such time, the refining and marketing companies can cover the increase in feedstock costs either by an increase in selling prices or a reduction in excise duties or both, they will have to continue to absorb a proportion of the increased feedstock costs which will hurt their profitability and increase borrowings,” it said.
