The Hindu Business Line : Falling crude price to lower under-recoveries on LPG

A $80 per tonne fall in international LPG prices in last two weeks, from as high as $550-560 per tonne, has brought cheer among the oil marketing companies. The fall would result in Rs 50 drop in under-recovery per domestic cylinder for IOC, BPCL and HPCL.

The under-recoveries on LPG were close to Rs 190 per cylinder two weeks ago. Kerosene prices, however, is not showing any sign of softening.

Diesel or gasoil (as it is internationally known) responded to crude price fall only marginally and is looking firm at $72-73 per bbl (from $82 two weeks ago) and should come down by at least $3 per bbl to help OMCs to break-even (on diesel).

Since diesel sales far outstrip the petrol sales, breaking even on the particular product would improve the profitability of OMCs dramatically.

"We are now eagerly looking at diesel to break the $70 barrier, created in last one year," said an official in the international trade desk of a PSU. However, considering winter demand ahead, there would be strong resistance to any such softening of gasoil prices.

"The quarterly projections available with us does not suggest any such fall," an official added.

Also stabilisation of international petrol prices vis-à-vis further fall in crude prices during last two weeks has improved the prospects of better crack-margin in the near future.

Living on the tenterhooks

However, contrary to the popular expectation, drop in crude prices has hardly made life easy for oil refining and marketing companies. While marketing losses have come down in last one and a half months, near wiping out of refining margin and inventory losses (due to sharp fall in crude price in last few weeks) are keeping the companies on the tenterhooks about the final outcome in the short term.

Refining margin generally contributes almost 30-35 per cent of the net profit of OMCs. According to a quick estimate, BPCL Mumbai refinery is likely to post a gross margin of $2 per barrel in October at the current level of crude vis-à-vis product prices.

This is lower than the $3 per bbl margin posted in September.

"Taking into account an operating or refining cost of $1.2-1.8 per bbl (the actual cost, depends on the configuration of the refinery and the kind of crude blend it handles at a particular time), our refineries will hardly be able to contribute to net profit at such low gross margins", said an official of a PSU oil company.