Refinery margins, stock gains to balance out losses on fuel, diesel: Fitch
NEW DELHI: State-owned fuel sellers IOC, BPCL and HPCL may suffer marketing losses in January-March 2022 quarter for holding fuel and diesel prices regardless of an increase in cost but robust core refining margins and windfall stock gains ought to mitigate the possible losses in near term, Fitch Rankings stated Tuesday.
The three fuel merchants kept gas and diesel costs the same for a record 137-days between November 2021 and March 2022 despite a nearly $27 per barrel increase in unrefined oil costs. The three business raised the rates by Rs 10 per litre over 16 days starting March 22 before again hitting a pause button.
“Gasoline (fuel) and gasoil (diesel) retail prices in India, and subsequently the marketing margins of the oil-marketing business (OMCs), must remain lined up with the motion in petroleum rates over the long term, regardless of erratic durations of continuous retail costs in the middle of heightened volatility in oil prices,” Fitch stated in a note.
The connection of retail fuel prices with the 15-day rolling average of petroleum prices (recommendation prices) has actually remained high at 93 per cent because the beginning of the Covid-19 pandemic in January 2020.
The correlation leaves out the effect on retail rates from changes in import tax duties, and consists of durations when the OMCs did not go through the movement in oil prices right away to customers, it stated.
“The OMCs gained from strong marketing margins during times of low oil rates (March-June 2020), and endured margin pressure during high oil costs (November 2021-March 2022) as they attempted to keep fuel rates affordable,” it said.
Nevertheless, November 2021-March 2022 was the longest market price freeze regardless of the recommendation petroleum costs increasing by almost $27 per barrel (or Rs 13 per litre) throughout the duration.
This “might cause marketing losses for the OMCs in the 4th quarter of the monetary year ending March 2022,” it stated including that retail fuel prices have actually consequently been raised by only around Rs 10, suggesting that further price walkings may be required for marketing margins to reach pre-November levels, and early FY23 marketing margins might likewise be under pressure.
“Our company believe that robust core refining margins and windfall stock gains should mitigate potential marketing losses in the near term, and the OMCs might see chances to recover some of the losses in durations of falling oil costs, if and when that occurs,” it stated.
Fitch stated it anticipates such instances of indirect state disturbance in fuel costs to be temporary, and their impact on the standalone credit profiles (SCPs) of the OMCs – Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPLC) – to be neutral over the long term.
“Nevertheless, if crude oil costs are continual beyond Fitch’s base-case presumptions, then record-high retail fuel prices may restrict the level to which the modifications are passed on, pressuring OMCs’ credit metrics,” it said without providing the referral cost.
Fitch thinks that freedom on retail fuel prices continues to remain an essential location, requiring clearness before the government’s proposed divestment of BPCL can be concluded.
“India has typically used its control of the OMCs to perform its socio-political agenda, affecting the competitiveness of personal fuel retailers, which at a 10 percent market share have restricted pricing power and align their list prices with the OMCs.
“We anticipate private fuel retailers to increase exports at better margins during times when domestic margins are under pressure,” the rating firm stated.
India’s export of diesel rose by 12 per cent year-on-year in January-February 2022.
The scores agency said the 3 fuel merchants are driven by the high possibility of parental assistance, based upon continued strong linkages.
Published at Tue, 19 Apr 2022 08:24:40 +0000