How Likely Petrol, Diesel Price Cut Would Impact Oil Marketing Companies

Retail prices of petrol and diesel are likely to reduce soon, as Oil Secretary of India Pankaj Jain, at an event, said, "State-run fuel companies may consider reducing retail fuel prices if global crude rates stay lower for an extended period."

This is a big respite, given that retail fuel prices at the pump have largely remained unchanged since May 2022, except for the Rs 2 per litre price cut in mid-March 2024. Since then, prices have remained stable.

How does a cut affect oil marketing companies, given that oil prices directly impact their marketing margins? Let's take a look.

Brent crude oil prices fell by more than 16% since the start of July 2024, reaching a 33-month low of $68.68 per barrel earlier this week. Currently, it is trading in the $72-73 per barrel range.

This decreasing price trajectory is positive for oil marketing companies such as Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. because it helps to improve their marketing segment's margins. According to Emkay, the drop in oil prices has actually led to companies experiencing supernormal marketing margins in the range of Rs 13–14 per litre in September.

The lowering of oil prices on the international level has led to an improvement in the marketing margins of the oil marketing companies. Indian Oil, BPCL, and HPCL could see their margins on petrol and diesel in the range of Rs 8–10 per litre during the second-quarter ending September 2024, according to Emkay. This is higher than the Rs 4-5 per litre range seen in the June quarter.

These higher petrol and diesel margins have not only covered the losses faced by the OMCs in relation to liquified petroleum gas sales, but it can also lead to an Ebitda growth of 21% to 138% in the second quarter, with HPCL topping the growth.

"The government may pass the benefits of lower oil prices to consumers in the form of a retail fuel price cut in the range of Rs 2-3 per litre," said Ashwin Jacob, partner and energy lead at Deloitte India.

Industry experts suggest that these price cuts could potentially happen before the assembly elections in Haryana, Maharashtra, and Jharkhand later this year. Emkay believes the likelihood of the price cut will be more towards Diwali before the Maharashtra government releases its election’s model code of conduct.

Although oil prices dropped below $70 per barrel in September, they have since risen to $72 per barrel. Emkay predicts that even if Brent crude averages around $75 in the second half of fiscal 2025 and oil marketing companies experience a Rs 4 per litre margin impact from potential retail fuel price cuts, they will still maintain healthy marketing margins of Rs 5-7 per litre.

Additionally, the brokerage anticipates a one-time government subsidy to offset the current LPG losses faced by these companies.