Refiners likely to start reducing fuel prices soon as margins improve

Refiners likely to start reducing fuel prices soon as margins improve

By Manish Gupta

State-run oil marketing companies (OMCs) are likely to cut fuel prices soon, as the government expects them to start passing on the benefit of lower crude oil prices to the customers.

The refiners had reported losses in the first two quarters of last fiscal, subdued net profits in the third quarter, and sharp increase in profits in the fourth quarter ending March 2023.

Officials in the petroleum ministry believe the OMCs will continue to make significant profits in the current and the next quarter (Q1 and Q2 FY24) as well, considering the moderation in crude oil prices.

The price of Indian crude oil basket had touched a high of $116 a barrel in June 2022 before coming down to $80 level in January-March 2023 period and to below $75 a barrel in May 2023.

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Despite wide movement in crude oil prices over the last year, price of transport fuels remained the same since April 2022. While initially the customers were saved from the rise in crude price with OMCs bearing the loss, now they are paying more despite fall in crude prices.

In June 2022, IOCL is estimated to have sold each litre at a loss of Rs 16 for petrol and Rs 23 for diesel. Last month in May, the refiner is estimated to have made a profit of Rs 13 and Rs 12, respectively.

Apart from the fall in crude oil price, the OMCs have made extra cut in their costs by importing discounted Russian crude, whose share in the overall crude oil import by India has risen more than 40%.

Brokerage firm Morgan Stanley in its recent report said that the OMCs are seeing their highest ever integrated margins and has predicted that they will recover past losses over the next few months.

“Right now prices can be cut because they are making good margins, on marketing side also, because of the decline in crude prices and the decline in the crack spreads of both MS and HSD,” said ICRA vice president and co-head Prashant Vashisht.

As for the quantum of cut in retail fuel price, he said that while it would depend on the marketing margins, he would expect a cut of at least Rs 2-3 in diesel and Rs 5-6 in petrol per litre.

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Vashisht believes the crude price is likely to remain below $80 a barrel for the next one or two quarters as Chinese consumption did not rise as expected, and also on the possibility that American and European economies may be heading for recession. Because of which output cut decision by OPEC+ did not have much impact, he added.

OMCs are expected to continue making profit till the oil price remains below $80-$85 a barrel, the senior oil analyst said.