In response to predictions that the retail prices of gasoline and diesel will likely be lowered in advance of the general elections that are set for next year, shares in the three state-owned oil marketing corporations saw a 4% decline on Friday. Analysts predict that any price reduction won’t, however, be significant enough to negatively affect the profitability of these companies, whose profits have increased over the last two quarters.
A retail price cut of Rs 4-6 per liter would effectively bring the diesel and petrol gross marketing margins of oil and gas companies (OMCs) closer to the normative level of Rs 3 and Rs 4 per liter, respectively. This would not negatively impact the OMCs’ profitability. Madhavi Arora, Lead Economist at Emkay Global, stated as much.
According to an earlier article in a business journal, deregulated gasoline costs might be lowered by around Rs 4-6 per liter, with the government and OMCs sharing equal responsibility for the reduction.
Emkay Global’s estimates indicate that the marketing margins of the OMCs if the price decrease falls within the specified range, would be Rs 2.6 for diesel and Rs 5 for gasoline per liter. For both car fuels, the normalized gross marketing margins are Rs 3 per liter. As a result, gas prices will probably drop by 6.2% and diesel prices by 4.4%.
According to Arora, “the government does not really have the space to absorb much additional burden of fuel excise cuts in 4QFY24,” despite the fact that revenue receipts from taxes have been strong this fiscal year due to strong tax buoyancy and higher dividends. So, any anticipated reduction in gasoline taxes would be limited to less than Rs4-6 per liter.
On the other hand, the margins of OMCs may be impacted if the cutbacks are in the Rs 8–10 per liter region.
“Even the normative margins of OMCs would be eaten away if it (cuts of Rs10/ltr) happens, unless the government shared the burden,” Arora said. “We observe that, on an annualized basis, the exchequer currently loses between Rs. 155 and Rs. 160 billion for every liter of excise cut.”
Furthermore, should petroleum prices begin to rise once again, the action may run counter to the government’s intended purpose. According to analysts, oil prices will likely be “hard” in 2024, which might put pressure on OMCs’ marketing margins once again.
According to Deepak Mahurkar, Leader of Oil & Gas at PwC India, “crude prices are expected to remain hard in the new year, on the back of producers’ pursuit of gains supported by unrest and supply constraints.”
Dan Klein, Head of Energy Pathways at S&P Global Commodity Insights, had stated that “even if such chaotic events (sudden geopolitical tensions) fail to emerge over the next 12 months, volatility will remain high as most energy markets have not yet been able to adapt to previous swings in supply and demand fundamentals to find a new normal.”
OMCs have made strong profits in the first two quarters of the current fiscal year compared to the first half of the previous fiscal year, mostly due to increased marketing margins.
Since April 2022, the government has not raised the price of auto fuels. At the moment, gasoline is subject to a 20.6% excise charge and diesel to a 17.6% excise.
Around 9:20 a.m. on Friday, shares of IOCL had dropped more than 3%, BPCL had down more than 3%, and HPCL had dropped more than 4.6%.
