Fitch Report Says Refinery Margins, Inventory Gains To Offset Losses On Petrol, Diesel

The three oil OMCs -- IOC, BPCL, HPCL -- kept the fuel rates unchanged for a record 137 days between November 2021 and March 2022 inspite of $27 a barrel rise in crude oil prices

New Delhi: Fitch Ratings on Tuesday said that state-run fuel retailers Indian Oil (IOC), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL) may see incur more marketing losses in the January-March 2022 period for holding petrol and diesel prices despite a sharp uptick in crude rates.

However, the rating agency in its report mentioned that robust core refining margins and windfall inventory gains should mitigate the potential losses in the near future.

The three oil marketing companies (OMCs) kept the fuel rates unchanged for a record 137 days between November 2021 and March 2022 inspite of $27 a barrel rise in crude oil prices, according to a report by the PTI.

The OMCs raised the rates by Rs 10 per litre over 16 days beginning March 22 before again hitting a pause button.

“Gasoline (petrol) and gasoil (diesel) retail prices in India, and consequently the marketing margins of the oil-marketing companies (OMCs), should remain aligned with the movement in crude oil prices over the long term, notwithstanding sporadic periods of constant retail prices amidst heightened volatility in oil prices,” Fitch said in a note.

The correlation of retail fuel prices with the 15-day rolling average of crude oil prices (reference prices) has remained high at 93 per cent since the onset of the Covid-19 pandemic in January 2020.

The correlation excludes the impact on retail prices from changes in excise duties, and includes periods when the OMCs did not pass through the movement in oil prices immediately to consumers, it said.

"The OMCs benefitted from strong marketing margins during times of low oil prices (March-June 2020), and endured margin pressure during high oil prices (November 2021-March 2022) as they tried to keep fuel prices affordable," it said.

However, November 2021-March 2022 was the longest retail price freeze despite the reference crude oil prices increasing by nearly $27 per barrel (or Rs 13 per litre) during the period.

This "may lead to marketing losses for the OMCs in the fourth quarter of the financial year ending March 2022," it said adding that retail fuel prices have subsequently been raised by only around Rs 10, implying that further price hikes may be required for marketing margins to reach pre-November levels, and early FY23 marketing margins may also be under pressure.

Diesel export by India rose by 12 per cent YoY in January-February 2022.