Icra Projects Potential Rs 2-3 Per Litre Cut In Petrol, Diesel Prices

The report noted that marketing margins for retail auto fuel sales among Indian Oil Marketing Companies (OMCs) have recently improved due to the crude price drop

A recent decline in crude oil prices has enhanced margins on retail auto fuels, allowing state-owned companies the opportunity to reduce petrol and diesel prices by Rs 2-3 per litre, according to a report from Icra, a rating agency. 

In September, the average price of the crude oil basket imported by India was $74 per barrel, down from approximately $83-$84 per barrel in March, the last time petrol and diesel prices were decreased by Rs 2 per litre. 

The report noted that marketing margins for retail auto fuel sales among Indian Oil Marketing Companies (OMCs) have recently improved due to the crude price drop. The agency expects that if crude prices remain stable at current levels, there will be potential for further reductions in retail fuel prices.

Girishkumar Kadam, Senior Vice President and Group Head of Corporate Ratings at ICRA said, "ICRA estimates that the OMCs' net realisation was higher by Rs 15 per litre for petrol and Rs 12 a litre for diesel vis-a-vis international product prices in September 2024 (till September 17). The retail selling price (RSPs) of these fuels have been unchanged since March 2024 (Rs 2/litre was reduced on petrol and diesel on March 15, 2024) and there appears to be headroom for their downward revision by Rs 2-3 per litre, if crude prices remain stable".

Crude prices have sharply declined in recent months, primarily due to sluggish global economic growth and high production levels in the US. In response to falling prices, OPEC+ has postponed its planned production cuts by two months. This drop in crude oil prices, which are refined into fuels like petrol and diesel, has reignited hopes for a reduction in fuel rates that have been frozen for over two years, with only a pre-election decrease in March.

Although petrol and diesel pricing is deregulated—allowing oil companies to set retail rates—the state-owned retailers Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) have rarely exercised this freedom since late 2021. They halted daily price revisions in November 2021 when prices reached an all-time high, prompting the government to partially roll back an excise duty hike implemented during the pandemic.

This price freeze extended into 2022, but rising international oil prices due to the war led to a Rs 10 per litre increase in petrol and diesel prices from mid-March 2022. This was later offset by an excise duty cut, which rolled back the Rs 13 and Rs 16 increases in taxes on petrol and diesel from the pandemic period. Following another freeze that began on April 6, 2022, rates remained unchanged until a reduction in March 2023, after which prices have been frozen again. Currently, petrol is priced at Rs 94.72 per litre in the national capital, while diesel costs Rs 87.62 per litre.

Icra reported that Singapore Gross Refining Margins (GRMs) experienced significant moderation in the first half of the 2024-25 fiscal year (April 2024 to March 2025), averaging around $4 per barrel due to decreased crack spreads from higher product output and lower demand. This is largely attributed to weak demand from China, driven by increasing electric vehicle (EV) sales and a downturn in the real estate market. Additionally, demand in Europe has been subdued due to sluggish industrial activity and a shift towards EVs.

The report noted that a marketing gain of Rs 1 per litre on petrol and diesel would offset a GRM loss of $0.9 per barrel for the domestic refining and marketing sector. 

Commenting on the profitability of oil marketing companies (OMCs), Kadam stated that OMCs reported healthy operating margins in FY2024, recovering from losses incurred in FY2023. Despite the moderation in GRMs, improved marketing margins are expected to help OMCs maintain profitability in the first half of FY2025. 

However, inventory losses from the significant drop in crude prices could impact profitability in Q2 FY2025, and standalone refiners may see their profitability affected by declining GRMs.

Icra's outlook for the refining and marketing sector remains stable. India’s petroleum, oil, and lubricants (POL) consumption grew by 5 per cent year-on-year in FY2024 and is projected to increase by 3-4 per cent in FY2025, driven by economic growth, increased mobility, and air travel. OMCs are planning significant capital expenditures in refining, with domestic refining capacity expected to rise to 306 million tonnes over the next three to four years, up from 256.8 million tonnes as of March 2024, to support growing consumption and exports. 

Icra anticipates healthy capacity utilisation among both public sector and private refiners in FY2025.