Oil slump helps retailers boost margins
MUMBAI: State-run oil marketing companies (OMCS), Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd, have stopped absorbing the government-mandated cut of ₹1 per litre on sales of petrol and diesel following an over 36% fall in global crude prices in the last three months, said two senior OMC officials, requesting anonymity.
On October 4, the centre had directed the OMCS to absorb a fuel price cut of ₹1 a litre, which according to estimates, would have led to a collective hit of ₹9,000 crore on margins over two quarters. “We are no longer absorbing the mandated price cut. There is no need when crude oil prices have cooled off,” said one of the officials cited above.
Retail prices of petrol and dieleaving sel in India are linked to their prices in global markets and not that of crude. That results in the demand-supply situation of finished products in global markets having some effect on domestic retail prices of auto fuel. Despite that, crude oil, which accounts for about 90% of the cost of these refinery products, is the biggest determinant of the retail price of fuel. On October 4, 2018 crude prices were at $83.58 a barrel. It fell to $53.32 a barrel on January 2.
The falling price of oil has also negated price intervention risks with auto fuel marketing margins now at unprecedented highs, them 5% above normal on average for the third quarter of FY19, analysts of Jefferies India Pvt. Ltd explained in a note on December 17.
“There is no direct co-relation between crude oil price and fuel retail price. Retail prices do not move in tandem with crude oil price. In October, crude oil dropped from $83 a barrel to $75.09 a barrel. OMCS have to contain volatility. So we only take a gradual price increase or decrease,” said the second official mentioned above.
To set prices of petrol and diesel, oil firms consider trade parity pricing, which is based on the prevailing prices of these products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. Other elements, such as dealer commission, excise duty and VAT, are added to the trade parity price.