Petrol, diesel prices: You gain, but this is how much fuel price freeze is costing OMCs

State-owned oil marketing companies (OMCs) have taken a combined hit of over Rs 500 crore during April as price revisions for petrol and diesel have been put on hold ahead of elections, analysts estimate. During the previous month, the daily prices moved marginally despite a larger increase in international prices, and the revisions were altogether stopped on April 25.

This has affected the marketing margins of three OMCs—Indian Oil Corp, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd. Though the officials from the oil ministry are tight-lipped over the development, the industry experts expect that revisions are unlikely to start at least until the elections in Karnataka, which are scheduled for May 12.

History indicates that the marketing margins were negative for a few fortnights in the run-up to state elections in 2015 and 2017, though the crude prices then were not rising the way they are now.

States including Karnataka, Mizoram, Chhattisgarh, Madhya Pradesh and Rajasthan are set to go for legislative assembly elections before the country gets ready for general elections in April-May 2019.

Daily revision in auto fuel prices was introduced in June last year to pass on the changes in the international oil prices and currency volatility.

Anoop Bhatia, vice-president & sector head (corporate ratings) at Icra said that non-revision or less-than-adequate increase in retail prices of auto fuels has led to a fall in the marketing margins of OMCs by Rs 1.5-2 per litre since the beginning of April.

“Apart from rising crude oil prices, depreciation in rupee is also making petroleum products costlier, thereby adversely impacting the margins of OMCs,” adds Bhatia.

The global petrol price rose 5.1% in April. However, the retail petrol price in Delhi increased only 1.2%. Similarly, while the global diesel price jumped 6.5%, the retail price in Delhi went up by about 2%.

ICICI Securities in its report has said that in the past, marketing margins have been better when a stronger government was in power vis-a-vis a weaker government.

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Auto fuels have been deregulated and margins were higher in FY2013-FY2014 when the National Democratic Alliance (NDA) was in power. But the auto fuels were subsidised for most of the FY2016 to mid-FY2015 during the United Progressive Alliance (UPA) government regime.

However, the UPA government was stronger after 2009 elections. In June 2010, it de-regulated petrol, which was subsidised since March 2005. It started gradual deregulation of diesel, which was also subsidised since March 2005, in January 2013.

“Thus, the hue and strength of government that comes to power after mid-2019 general elections would determine the outlook on auto fuel marketing margins thereafter” the report adds.

Ravi Shinde, president of All India Petroleum Dealers Association said that though the stoppage of daily pricing has come as a respite for the dealers, they know its only temporary and may last till the elections.

The dealers have been asking the OMCs to continue the old practice of fortnightly price changes instead of the daily ones.

Experts pointed out that the government will also have to keep its eye on the changing global geopolitics as the US has now decided to re-impose the sanctions on Iran, thereby affecting the oil prices in the market.

By Shahkar Abidi, DNA Money