A labour carrying LPG gas cylinders on his back at Ghum Railway Station, in Darjeeling. File
| Photo Credit: ANI

The government, however, assured that this is limited only to the premium variants and that the prices of the normal grades of petrol and diesel remain unchanged.
| Photo Credit: Muthuganesapandy. M

Petrol and diesel prices are unlikely to be increased despite firming raw material costs because of upcoming general elections next year, Moody’s Investors Service said.

Three state-owned fuel retailers — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) — which control roughly 90% of the market, have kept petrol and diesel prices on freeze for a record 18 months in a row.

This is despite the raw material (crude oil) cost surging last year, leading to heavy losses in first half of 2022-23 fiscal year before easing oil prices propelled them to profitability.

Also Read | High oil prices to weaken profitability of 3 PSU oils firms, says Moody’s

International oil prices have firmed up since August, leading to margins of three retailers turning negative again.

“High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India — IOC, BPCL and HPCL,” Moody’s said in a report.

“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024.”

The OMCs’ marketing margins — the difference between their net realized prices and international prices — have already weakened significantly from the high levels seen in the quarter ended June 30, 2023 (1Q fiscal 2024). Marketing margins on diesel turned negative since August while margins on petrol have narrowed considerably over the same period as international prices increased.

“The increase in raw material costs comes after the price of crude oil jumped around 17% to more than $90 per barrel in September, from an average of $78 a barrel in 1Q fiscal 2024,” Moody’s said. “An extension in production cuts by the Organization of the Petroleum Exporting Countries (OPEC) of around 1 million barrels a day until December 2023, combined with Russia’s extended export cuts of around 300,000 barrels a day over the same period have driven oil prices higher.”

Nonetheless, high oil prices are unlikely to be sustained for long as global growth weakens, it said.

“The decline in the OMCs’ marketing margins has been mitigated to some extent by the increase in gross refining margins (GRMs). The benchmark Singapore GRMs have improved since June in part due to continued growth in liquid fuels consumption in the region as well as planned refinery outages which constrained the supply of petroleum products in the region,” it said.

The ratings agency expected GRMs and international prices of transportation fuels to moderate in subsequent quarters as concerns over China’s economic slowdown dampen demand while supply increases as refineries come back online after the completion of scheduled maintenance activities.

“Although a smaller gap between international and domestic prices will reduce marketing losses for the OMCs, their overall profitability will remain weak as retail selling prices will likely remain unchanged,” it added.

After very strong earnings in April-June quarter, OMCs’ operating performance is expected to weaken over the next 12 months as oil prices remain at current elevated levels.

“Still, the three companies’ fiscal 2024 (April 2023 to March 2024) earnings will remain strong and higher than historical levels, even if crude oil prices remain at current levels of $85 per barrel to $90 a barrel in the second half of fiscal 2024.

“This is attributable to the OMCs’ exceptionally strong earnings in 1Q fiscal 2024. The three companies’ EBITDA in the first quarter alone was close to their average annual EBITDA for the last few years,” Moody’s said, adding the OMCs will start incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around $100.

Strong marketing margins for petrol and diesel drove the robust operating performance in 1Q fiscal 2024.

OMCs’ net realised prices on sale of diesel and petrol have largely remained unchanged since April 2022 even though feedstock costs had declined steadily. The price of Brent crude declined to $78 per barrel (bbl) in 1Q fiscal 2024 from $112 in 1Q fiscal 2023.

Among the three OMCs, IOCL and BPCL are better positioned to withstand any further increase in crude oil prices, compared to HPCL, the rating agency said, adding the difference in the OMCs’ capacity to absorb an increase in feedstock costs stems from the difference in their business profiles.

IOCL’s and BPCL’s larger-scale operations and a high degree of integration between their refining and marketing segments allow them to weather the impact of adverse changes in the operating environment. IOCL’s presence in petrochemicals and pipelines also reflects its business diversification. Meanwhile, HPCL’s smaller scale and a higher dependence on its marketing operations make it more vulnerable to any unfavourable price movements.

“Strong earnings in 1Q fiscal 2024 and lower crude oil prices compared with fiscal 2023 have reduced the OMCs’ working capital requirements and allowed them to reduce their borrowings over the past few months. As a result, we expect leverage, as measured by debt/EBITDA, for all the three companies to remain well positioned compared with the rating thresholds through fiscal 2024. This is despite capital spending and shareholder payments remaining high and rising crude oil prices resulting in increased working capital requirements in the period,” it said.

Meanwhile, the Indian government’s ₹30,000 crore in capital support for the oil marketing sector announced in the budget earlier this year will boost cash flows for the OMCs and partially cover their capital spending needs. To this effect, IOCL and BPCL have already announced rights issues to the government.

Moody’s said it has however not factored this into its projections as the timing and quantum of such proceeds remain uncertain at this time.

Petrol sales fell 8 per cent to 1.19 million tonnes in the first fortnight of August 2023, when compared with the same period last year. File photo
| Photo Credit: Nagara Gopal

India’s petrol and diesel consumption fell in the first half of August from the previous month and a year ago, as monsoon rains hit mobility and slowed industrial activity, preliminary data of state-owned firms showed on Wednesday, August 16, 2023.

This is the second month in a row that fuel sales have fallen. The four months of monsoon generally see muted consumption.

Also read: PM Modi rolls out 20% ethanol-blended petrol in 11 States/UTs

Consumption of diesel, the most consumed fuel in the country accounting for about two-fifths of the demand, fell 5.7 per cent to 2.67 million tonnes from August 1 to 15, compared to the year-ago period.

Consumption had fallen by a steep 15 per cent in the first half of July but picked up in the second fortnight.

Month-on-month sales fell 9.5 per cent, when compared with 2.95 million tonnes of diesel consumed in the first half of July.

Diesel sales typically fall in monsoon months as rains lower demand in the agriculture sector which uses the fuel for irrigation, harvesting and transportation. Also, rains slow vehicular movements.

Consumption of diesel had soared 6.7 per cent and 9.3 per cent in April and May, respectively as agriculture demand picked up and cars yanked up air-conditioning to beat the summer heat. It started to taper in the second half of June after the monsoon set in.

Petrol sales fell 8 per cent to 1.19 million tonnes in the first fortnight of August, when compared with the same period last year.

Consumption had dropped 10.5 per cent in the first fortnight of July but picked up in the latter half. Sales were down 5.2 per cent month-on-month, the data showed.

India’s economy has demonstrated remarkable resilience and is likely to have surpassed the performance of most major economies during the first half of 2023.

With steady and healthy economic activity and ongoing air travel recovery, India’s demand for oil products is anticipated to remain strong in the remainder of the fiscal, analysts said.

Consumption of petrol during August 1-15, was 20.6 per cent more than in the COVID-marred first half of August 2021 and 25.6 per cent more than in pre-pandemic August 2019.

Diesel consumption was up 26 per cent over August 1-15, 2021 and 16.8 per cent when compared with August 1-15, 2019.

Rise in ATF demand

With the continuing rise in passenger traffic at airports, jet fuel (ATF) demand rose 8.1 per cent to 290,300 tonnes during the first fortnight of August as compared to the same period last year.

It was 66.7 per cent more than in August 2021, but 4.1 per cent lower than pre-COVID August 2019.

Month-on-month jet fuel sales fell 2.1 per cent when compared with 296,500 tonnes in July 1-15, 2023.

Cooking gas LPG sales were up 3.7 per cent year-on-year to 1.21 million tonnes in August 1-15. LPG consumption was almost 12 per cent higher than in August 1-15, 2021 and 11.2 per cent more than pre-COVID August 1-15, 2019.

Month-on-month, LPG demand was however down 2 per cent compared to 1.23 million tonnes of LPG consumption during July 1-15, the data showed.