The Hindu Business Line : Dip in crude prices may not be enough for oil cos to celebrate

Oil slick
The current retail prices can support a crude price of $68 a barrel and rupee at a conversion rate of Rs 43-44
India’s crude oil basket has declined to $81.43 on Monday
The fall in crude prices also results in dip in gross refinery margins of the refineries

Richa Mishra

New Delhi, Oct. 7 Despite the softening of crude oil prices, there may not be a significant increase in the profitability of the three public sector refining-cum-retailing companies – Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd. The net impact would be minimal on the revenue losses incurred by them on selling auto and cooking fuels below the market price.

“The net impact of the fall in crude oil prices would be minimal on the revenue loss being incurred by OMCs. Though the import burden is coming down in terms of dollars, unless the rupee appreciates we will not get any benefits as there may not be substantial relief on under recoveries. For us to reap the full benefit of the fall in crude prices, the rupee also needs to appreciate versus the dollar by at least 10 per cent to Rs 44-Rs 45 level,” Mr S.V. Narasimhan, Director Finance, IOC, told Business Line.

The OMCs suffer revenue loss on domestic sale of petrol, diesel, LPG and kerosene at a controlled price. The current retail prices can support a crude price of $68 a barrel and rupee at a conversion rate of Rs 43-44.

Agreeing that the fall in crude oil prices has brought down the projected under recovery on the four products to Rs 1,60,000 crore for the fiscal from the previous estimate of over Rs 2,00,000 crore, the OMCs said that with rupee depreciating the cost of buying crude oil has increased, thus increasing the cost of producing fuels.

In fact, this has led to even private sector players like Reliance Industries Ltd to close their retail outlets. India’s crude oil basket has declined to $81.43 on Monday, falling over $10 a barrel during the last week. The basket has averaged $85.84 a barrel in October so far. The under recovery on sale of petrol stood at Rs 5.57 a litre, diesel Rs 12.95 a litre, LPG Rs 335.03 a cylinder, and SKO Rs 29.19 a litre.

Besides, the fall in crude prices also results in dip in gross refinery margins (GRM) of the refineries, industry sources said. The three PSUs are integrated refinery-cum-retailing companies. For the current fiscal, according to industry estimates the easing of crude prices would mean the companies clocking single digit GRMs. The GRM is the difference between the selling price of the finished products and raw material cost. OMCs are quick to point out that the decline in GRM would also be because of inventory losses. The refineries have stocked their inventory with crude bought at a higher price.

The industry sees crude prices hovering around $85-$90 a barrel. Industry sources explain that if as on October 1 the rupee versus dollar had retained equilibrium, and crude prices had eased, then the under recovery on petrol could have come down to Rs 2 a litre. However, this time round the benefit will be just Re 0.65 a litre, they said.

As regards whether decline in freight charges have made a positive impact on their profitability, OMCs sources said, “We mostly have vessels on charter. These are fixed annual contracts, so what we pay is for the full year, irrespective of whether the prices have undergone any change.”

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