OMCs may find it difficult to pass on price hike in upcoming quarter

With the rise in crude oil prices in international markets, staterun oil marketing companies (OMC) have been able to pass on most of the hike to the retail market. However, as resentment against higher fuel prices gets louder, not many are sure for how long the OMCs will manage to maintain margins.

In the next quarter, the country will also start gearing up for various Assembly elections, which analysts expect, could put the government as well as the OMCs under pressure. The Opposition parties have already called for a nation-wide strike on Monday to protest the rise in fuel prices.

“Given the recent uproar over the fuel price hike, the government may come under pressure to cut down on duties in the next few months, and, it won’t be a surprise, if the OMCs are expected to absorb some of it,” said an analyst with a domestic brokerage firm.

Diesel and petrol prices in the country have increased sharply in line with the rise in global prices. Both fuels have touched new highs, most of the rise seen in the last six months. On Friday, diesel cost ~72.1 per litre in Delhi, 24 per cent higher from a year back and petrol was ~80 per litre, 15 per cent higher from a year back. In Delhi, for instance, the central and state tax together add ~25.79 a litre to retail price for diesel and ~36.31 for petrol.

The past year saw spot Brent crude prices rise 41 per cent to close at $76.7 per barrel on Friday. With oil marketing companies passing on most of the price hike to the end customer and no duty respite from the Centre, fuel prices have remained high.

“The prices are being decided based on a formula, which takes into account product prices and rupee-dollar rate. They are being fixed independently by oil companies with no interference and the same will continue in the coming months," said Gurmeet Singh, director-marketing at Indian Oil Corporation (IOC).

However, not everyone in the industry is as confident. "It is right that OMCs have not come under pressure to cut down on the hikes being passed on through petrol, diesel price hikes. However, what will pan out in the December quarter will be different, as crude oil prices will see the upside effect on the winter,” said the analyst.

India Ratings in its August report said it expects crude oil prices to remain between $65 and $ 70 per barrel in the second half of the current fiscal year, driven by rising geo-political tensions, OPEC supply cuts and draw-downs in crude oil inventory stocks, along with slower growth in the total exploration capital expenditure in the US.

Besides, OMCs have also managed to maintain prices in the bulk markets such as aviation turbine fuel and bulk diesel sales, according to analysts.