The sudden spike in oil prices from below $74 to above $84 a barrel within a month is likely to impact the profitability of the oil refining and marketing companies, further reducing the chances of any moderation in retail prices of auto fuels.
Besides, the increase in oil prices are not likely to benefit even the upstream companies much, as the government raised the windfall tax on petroleum crude to Rs 4,250 per litre from Rs 1,600 per litre with effect from Tuesday (August 1, 2023).Refiners like Indian Oil Corp Ltd (IOCL), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) were making healthy marketing margins till recently, which had fueled speculations that the retail prices may be reduced.
The three state-run OMCs, which control 80% of the fuel supply in India, haven’t changed retail petrol and diesel prices since April 6, 2022, even though oil prices had touched $116 a barrel in June 2022 before falling to $79 in early January 2023.As for the upstream companies Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL), the rise in oil prices would have given additional income but for the windfall tax that the government levies whenever the price goes above $75 or so.
“I don’t think they will be able to get any additional benefit out of this simply because the government scoops away whatever is the upside,” said Vasisht, adding that the tax remains nil when the price is in the range of $70-75 a barrel.
Analysts believe that even $70-75 is a very good realisation for the upstream companies and, despite no upside from the increase in oil prices, the capital expenditure plans of the oil producing companies would not get impacted.
The fall in crude prices in the second half of last fiscal and Q1FY24 had enabled the OMCs to report profits after losses witnessed in earlier quarters. BPCL, for instance, reported a consolidated net profit of Rs 10,644 crore in the first quarter ofFY24 as compared to a loss of Rs 6,148 crore in the year ago quarter as the marketing margins widened considerably. The company suffered a major loss in the first two quarters of FY23 due to high crude oil price as the retail fuel price remained unchanged. The refiner finally turned around and reported net profits of Rs 1,747 crore in Q3 and Rs 6,478 crore in Q4.
On the gas side, as LNG prices are pegged to dated Brent prices, the prices of long term LNG would increase. Even the domestic gas prices are likely to increase if the oil prices remain high as they are also revised on a monthly basis.
Generally city gas distributors (CGDs) like GAIL India and Indraprastha Gas Ltd (IGL) have passed on the increase in costs except last year. If there is any failure in passing on the increased costs, their profitability will be impacted, analysts said.
As for the oil prices, factors that would determine its trend are the oil production cuts announced by Saudi Arabia and Russia, which have brought down the inventories of oil consumers, and the ongoing recession which is seeing significant decline in China’s consumption.
Besides, analysts said increase in oil prices would itself have a dampening impact on demand. Yet, on an average the expectation of oil prices is to remain in the range of $75 to $95 for the current financial year.