Indian Oil Companies Profit from Drop in Oil Prices, But No Relief for Consumers in Sight

Indian oil marketing companies (OMCs) are now making a profit of 11.1 per litre of diesel and 8.7 per litre of petrol as a result of last week's drop in global crude oil prices below $75 per barrel, but consumers hoping for a retail price cut amid consistently high inflation are unlikely to experience any relief anytime soon.

OMCs had frozen retail prices for the two fuels since May 2022, when the government reduced the excise duty on both fuels amid high global oil prices in the wake of the Russia-Ukraine war, according to analysts. They believe OMCs will need two to three-quarters of such profits to make up for losses incurred through 2022.

According to a recent statement by the Petroleum Ministry to Parliament, the three major oil marketing companies in India, namely Indian Oil (IOCL), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL), have suffered losses amounting to Rs. 18,622 crores from April to December 2022. The statement also pointed out that despite the high international prices of petrol and diesel, their prices have not been raised. It is worth noting that the pricing of petroleum products is officially deregulated, and these companies are allowed to adjust their prices on a daily basis.

Moody's Investors Service had reported in a rating review of the three OMCs last month that the average Brent crude oil prices, which were at around $105 per barrel in the first half of 2022-23, had dropped to around $85 per barrel between October 2022 and February 2023. The report also highlighted that this decrease in oil prices, coupled with an increase in the procurement of discounted Russian oil, had boosted the profitability of these companies.

According to a research note on the oil and gas sector by JM Financial, the drop in oil prices below $75 a barrel due to the troubles faced by U.S. and European banks, which have sparked concerns about contagion effects and a decrease in demand, has led to an increase in the gross marketing margin for Indian OMCs. Specifically, the note stated that the gross marketing margin for diesel has risen to Rs. 11.1 per litre, while that of petrol has increased to Rs. 8.7 per litre.

According to Dayanand Mittal, a JM Financial analyst, if the price of crude oil continues to remain below $75-80 a barrel and the government allows OMCs to recover their past losses by not reducing retail prices, this could help them recover a portion of the large net loss (amounting to ₹50,000 crores) that they have suffered in the first nine months of 2022-23. Mittal estimates that without government compensation, it may take the OMCs two to three quarters to recoup their losses at the current rate.

The government approved Rs. 22,000 crores in January as compensation for OMC losses resulting from domestic LPG sales. The Center has included 30,000 crores as capital support for the oil marketing sector in the Budget for 2023–2024.

This development is credit positive and will further support the OMCs' cash flows, according to Moody's, which also stated that it anticipates the government to "remain supportive and compensate the oil marketing companies for their past losses" even though the timing of the disbursement and the capital support mechanism is currently unknown.

In the event that the government provides compensation to the oil marketing firms within the next three quarters, there could be a possibility for the OMCs to reduce their prices earlier if the global oil prices continue to remain at or below the levels of $75-80.