Even though crude oil prices have moderated at $90 a barrel from its highest of $97 a few days back, analysts see prices to remain elevated till the year end which is likely to cause losses to the oil marketing companies (OMCs) from sale of auto fuels in the second half of the current fiscal. At present, the refineries are estimated to be facing higher under recoveries of Rs 5/litre in case of diesel compared with Rs 2/litre in August.
For consumers, costlier crude has dampened the hopes of a cut in auto fuels prices, instead raised concerns of prices getting higher. However, analysts say that a rise in prices of petrol and diesel is unlikely, given the upcoming assembly polls and general elections in 2024.
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In the second quarter of the current financial year, the gross marketing margin of OMCs in diesel has shown a decline and is currently at Rs 0.3/litre, analysts said. “In the first quarter, it was Rs 9.5/litre.” Analysts also believe that on a current basis, losses could be even higher.
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In the case of petrol sales, current under recoveries are seen at Rs 5/litre.
“As of now, OMCs are making under-recoveries on diesel. In case prices remain elevated, then (under recoveries on) diesel will continue to cause marketing loss for these companies,” said Prashant Vashisht, vice-president at ICRA.
Moreover, experts believe that OMCs will not just be affected by higher under recoveries, but their entire business ecosystem is likely to get impacted.
“We were expecting in the beginning of this year when crude prices softened, that it will be a strong year for OMCs. Back-to-back years of losses will further impact investor sentiment because until general elections 2024, there will be no change in prices of auto fuels,” said an analyst who wished not to be identified.
“Refining margins also will be corrected. They will be needing capex also. All in all, when the equity is eroding for two consecutive years, then why will the investor even look at it. Sentiments will remain negative these will be available at below book values.”
Even though coming months can prove to be tough for the refineries, under recoveries of these OMCs will be capped to some extent as analysts do not see crude prices to cross a level of $100/bbl.
“If crude prices remain high above $100/bbl, there will be demand destruction. Sustainability of crude prices above $100/bbl is tough,” Vashisht said. “I don’t see very large under recoveries.”
“Typically, whenever the global crude oil prices rise dramatically, there is at least two-three months’ lag because of sizeable inventories and initiatives which OMCs have considerably undertaken. So, I don’t expect immediate petrol and diesel price increases,” said Gaurav Moda, Partner, Energy Sector Leader from EY India. “If prices continue to remain high, then at some point the OMCs will have to reevaluate on what to extract out of the market.”
WTI crude prices on the New York Mercantile Exchange were at $99.22/bbl on Wednesday, up 1.1% from the previous close and that of Brent was up by almost 1% at $90.03/bbl.
Oil prices need to fall to levels of around $80 a barrel to be good for consumers, Oil Minister Hardeep Puri told Bloomberg TV on the sidelines of Abu Dhabi International Petroleum Exhibition Conference on Tuesday.
“It’s in the interest of all countries, including the producing countries and certainly the consuming countries, to have a healthy discussion on what constitutes a reasonable price band,” Puri told Bloomberg TV.
