OMCs – The Wire

No Talks With State-Owned Oil Retailers On Reducing Fuel Prices: Union Minister

Petroleum and natural gas minister Hardeep Singh Puri also denied reports of India facing problems paying for Russian oil.

New Delhi: Hardeep Singh Puri, the Union petrol and natural gas minister, told reporters on Wednesday (January 3) that the government had had no discussions with major state-owned oil retailers on reducing fuel prices.

A 17% reduction in the cost of importing crude oil between September and December last year had raised expectations among some of a reduction in fuel prices, the Hindustan Times reported.

When asked about such a reduction, Puri responded that the situation was “highly turbulent” and said there had been no discussions with the retailers on the matter, the Press Trust of India reported.

“I have clarified [that] there has been no discussion with the oil marketing companies on any such issue. And please, we are in a highly turbulent situation,” Puri said.

He continued: “What does turbulent mean? There are two areas on the … global map which are in [a] conflict situation … In the last one week or ten days, we’ve had challenges to shipping,” and referred to challenges specifically in the Red Sea and the Suez Canal.

“God forbid, if there is a further challenge or disruption, do you see the impact that can be caused?”

Shipping routes in the Red Sea have been disrupted since Yemen-based Houthi groups began targeting ships travelling there in response to Israel’s war on Hamas.

Puri said the government was responsible for ensuring “availability and affordability” but added that it did not determine how oil companies priced fuel.

India’s three major state-owned oil retailers – the Indian Oil Corporation Limited, the Bharat Petroleum Corporation Limited and the Hindustan Petroleum Corporation Limited – have kept petrol and diesel prices unchanged since April 2022, HT’s report said.

PTI cited officials as saying that although the three retailers made profits in the first quarter of the ongoing financial year, they are yet to recoup losses they had made earlier.

‘No payment problem’

Puri also denied reports that India was experiencing problems in paying for Russian oil.

“There is no payment problem. I keep telling you, but you guys keep inventing it. It is a pure function of the price at which our refiners will buy [the oil],” he said.

“I’ve never heard our companies say that payment problems have affected our supplies,” Puri also said in Hindi.

“If they [Russia] don’t offer us [a good] discount, why would we buy from them?” he asked according to Reuters.

The news agency had earlier reported citing anonymous sources that the Indian Oil Corporation Limited’s payments to a unit of Russian oil producer Rosneft were being hampered due to currency issues.

India is dependent on oil imports as its domestic oil output lags behind growing demand.

It has purchased oil from Russia at cheaper prices in a bid to cut its oil import bill, taking advantage of discounted prices owing to Western sanctions starting after Russia’s February 2022 invasion of Ukraine.

Russia has grown to be India’s largest supplier of oil and provided up to 40% of India’s imports of the product in the first half of the fiscal year 2023-24, Reuters reported.

As Diesel Hits All-Time High in Delhi, Dharmendra Pradhan Promises Relief

New Delhi: The Narendra Modi government’s macroeconomic challenges are getting tougher as India faces the double whammy of a strengthening dollar and a surging crude oil market. This comes at a time when the government’s fiscal position is already precarious and the next general elections are less than a year away.

State-owned oil marketing companies (OMCs) jacked up the price of diesel to an all-time high of Rs 67.82 a litre on Monday in Delhi as the global crude oil market rallied on news that the looming US-China trade war has been put on hold, keeping under pressure the rupee which opened 12 paise lower against the US dollar in today’s trading.

Petrol prices too hit a new high of Rs 76.57 a litre in the national capital.

The rupee has already depreciated by more than 6% against the greenback this year and its fortunes remain in the doldrums as crude is going strong. If forward rates are anything to go by, the rupee could breach the psychological mark of $70 against the dollar by the end of next February.

In the run-up to the Karnataka election, OMCs had kept daily price revision for petrol and diesel on hold.

They now need need to raise petrol prices by Rs 4.6 per litre, or 6.2%, and diesel rates by Rs. 3.8 per litre, or 5.8%, just to make up for losses incurred by them when price hikes were on hold, says brokerage Kotak Institutional Equities. That means more pain for millions of middle-class Indians.

Most of this rise in prices is due to high excise duties levelled on fuel. The Modi government raised excise duty by nine times during 2014 and 2015, taking advantage of low oil prices in the international market. However, it appears in no mood to reduce high taxes to provide relief to auto fuel consumers.

The back of a truck carrying petroleum in Bhubaneswar, Odisha. Credit: proxyindian/Flickr, CC BY 2.0

Economic affairs secretary Subhash Chandra Garg had said last Friday the government was watching the situation developing from oil prices hitting $80 a barrel and adequate steps would be taken. But when asked if the government would cut excise duty on petrol and diesel, he evaded the question.

Over the weekend, petroleum minister Dharmendra Pradhan also moved to assure that the government will soon come out with a mechanism to cushion the impact of rising crude price on auto fuel consumers.

“Various alternatives are being looked at,” Dharmendra Pradhan said in a televised speech, without sharing details on what arrangement his ministry is working on to protect retail fuel consumers.

Before fuel prices were deregulated, upstream oil companies were required to share OMCs’ under-recoveries on retail sales of petrol and diesel. If the government revives the old arrangement of under-recovery sharing, it would be a big setback to fuel market reforms.

On Monday, industry lobby group FICCI called for an immediate cut in the excise duty on oil imports.

On Monday, US crude futures rose 0.8% to $71.83 per barrel, near last week’s three-and-a-half-year high of $72.30 while Brent crude futures notched up 0.8% to $79.10 per barrel, according to agency reports.

Last week, crude oil prices had briefly crossed $80 per barrel for the first time since November 2014.

Brent crude futures were at $79.13 per barrel at 0121 GMT, up 62 cents, or 0.8 percent, from their last close. Brent broke through $80 for the first time since November 2014 last week.

US West Texas Intermediate (WTI) crude futures were at $71.83 a barrel, up 55 cents, or 0.8%, from their last settlement.

The US trade war with China is also “on hold” after the world’s largest economies agreed to drop their tariff threats while they work on a wider trade agreement, US treasury secretary Steven Mnuchin said on Sunday, giving global markets a lift in early trading on Monday.

“The temporary trade dispute will de-escalate over time through negotiation,” US bank Morgan Stanley said.

“Both sides plan to work on implementing agriculture and energy purchases and to continue to negotiate on manufacturing and service trade, bilateral investment and intellectual property protection in coming months,” it added.

With Centre Refusing to Cut Taxes, Oil Marketing Companies Take a Beating

Data show that state-run oil retailers have been slower in hiking retail fuel prices in April than what international prices would justify.

New Delhi: Bucking the broader market trend, state-owned oil marketing companies (OMCs) have seen their stock slump by anywhere between 7.9% and 15.7% over the last month over concerns that they might not be allowed to pass on full increase in the global market rates to retail fuel consumers.

Broader market indices like S&P BSE 100 and Nifty 100 rallied and posted gains during the same period.

The government cannot compensate the OMCs for any under-recovery that they bear on sales either. So the OMCs will have to absorb the impact on their balance sheets, which could dent profits. That is why traders are hammering down their share prices.

Global crude prices have jumped by more than 10% during the last one month. Organisation of Petroleum Exporting Countries’ (OPEC) average crude basket price has risen from $64.11 a barrel (bbl) on March 20 to $70.96/bbl on April 20.

The market’s fears are not unfounded. Data show that OMCs have been slower in hiking retail fuel prices in April than what international prices would justify.

The average price of OPEC crude has been 5.6% higher in April 2018 ($67.22/bbl) compared to March 2018 ($63.65/bbl)

Against that, the price of petrol was hiked by just 0.4% to Rs 74.08 a litre in Delhi. The 1.1% hike in the price of diesel during the period too was behind the curve.

In early April, media reports noted that government-run oil retailers had asked not to increase petrol and diesel prices and instead absorb the losses so as to cushion retail consumers of the fuel.

The stocks of HPCL, which has the lowest refining capacity among the three OMCs, have been hit the hardest while IOC’s shares have suffered relatively modest erosion of valuation.

While IOC has seen an erosion of 7.9% in its stock value in one month to April 20, HPCL’s share has tanked by 15.7% during the period.

BPCL’s stocks fell by over 12% during the same period.

Refining capacity cushions OMCs against the impact of under-recovery on retail sales. The higher the refining capacity an OMC has, the lesser the impact of under-recovery on its bottom line.

Movement in stock prices of OMCs, oil producers in one month to April 20

OMCs	IOC(Rs/share)	BPCL (Rs/share)	HPCL (Rs/share)	ONGC	Oil India	S&P BSE100	Nifty100
March 20, 2018	173.85	424	354.85	174.10	218.08	10,496.58	10,478.15
April 20, 2018	160.10	371.40	299.05	182.35	230.45	10,979.37	10,966.85
Loss or gain (%)	(-7.9)	(-12.4)	(-15.7)	4.7	5.6	4.6	4.6

Source: BSE, NSE

On the other hand, state-owned oil producer ONGC’s share price has risen by 4.7% during the same period. It is not surprising considering that oil price is globally taken as a proxy for valuation of upstream companies. ONGC gets international price on sale of its crude production.

As reported by The Wire last September, India’s petrol and diesel prices are among Southeast Asia’s highest.

Crude prices have crossed $70/bbl level, touching a four-year high. Bullish investors have increased their wagers on crude oil rally, ignoring the risk of US shale production causing oversupply in the market.

Finance minister Arun Jaitley had raised excise duty nine times between November 2014 and January 2016 to shore up finances as global oil prices fell. It cut tax Rs 2 a litre last October to defuse inflationary pressure.

Later, in January, ahead of the presentation of the Union budget 2018-19, the petroleum ministry had sought a reduction in excise duty on petrol and diesel to cushion consumers from the impact of rising fuel prices in the global market. But struggling to balance his fiscal arithmetic, Jaitley ignored the call.

After slashing excise duty last October, the Centre had asked states to also lower VAT, but only Maharashtra, Gujarat, Madhya Pradesh and Himachal Pradesh have acted so far.

In June 2014, global oil prices crashed. Since then, the Modi government has taken advantage of low oil prices to jack up excise duty on petrol and diesel and fill coffers, which in turn helped it contain the country’s fiscal deficit.

Excise duty on petrol and diesel went up by Rs 11.77 and Rs 13.47 per litre, respectively. As a result, government excise mop up more than doubled to Rs 242,000 crore in 2016-17 from Rs 99,000 crore in 2014-15.

Last June, the OMCs dumped the 15-year old practice of revising rates on the first and 16th of every month and switched over to a daily price revision system that instantly reflects changes in cost. Since then, prices are revised every day based on a 15-day rolling average rate of their international benchmark.