The Hindu Business Line : Long-term measures needed to tackle crude price surge

New Delhi, March 9 Though the recent auto fuels price hike could provide some cushion for the domestic oil marketing companies (OMCs) from the volatile global crude prices in the current fiscal, their profitability could be hit by the mounting pressure on marketing margins.

Analysts feel that though the strength of refining margins would lessen the financial burden on these companies, if the crude price sustains at the current level, the marketing margins would be squeezed.

Marketing margins are the difference between the refinery gate price and retail selling price of the petroleum products. Official sources told Business Line “as of now the surge in crude prices is not a cause of worry as the Government has already taken care of the under-recoveries estimated to be accrued this fiscal. Next fiscal also the recent price increase on petrol and diesel would provide some cushion for the OMCs against the surge in global crude price.”

Under-recoveries

Analysts agree that though for this fiscal more or less under-recoveries have been taken care of, the Government may have to think of some other long-term measures including duty rationalisation at both State and Central level.

While the oil prices at the New York Mercantile Exchange touched a new high of $105.97 per barrel and Brent closed at $103.31 a barrel on Thursday, the Indian crude oil basket hit a record high of $ 98.99 a barrel. This is the highest the Indian basket has reached during the current fiscal.

On Friday also crude continued its strong run.

Industry analysts said the continued squeeze on marketing margins will be a major cause of concern for the marketing companies in the next fiscal if crude continues at the current level.

This is because the oil companies continue to sell petrol, diesel, cooking gas and kerosene under the public distribution system below the cost price and another price rise on auto fuel seems unlikely, analysts said.

The total under-recoveries on sale of the four products are estimated at Rs 71,808 crore for the current fiscal.

The Government on February 14 decided to hike the retail selling price of petrol and diesel by Rs 2 and Re 1 a litre respectively.

It, however, left the prices of LPG and kerosene untouched. It also decided to increase oil bonds issued by the Government to partially offset the impact of selling the four products below cost price.

The bonds will now cover 57 per cent of the total under-recoveries from the current 42.7 per cent.

As of March 1, the desired increase in the retail selling price (RSP) of petrol at current crude price levels is Rs 9.68 per litre, diesel Rs 12.21 per litre, kerosene sold under public distribution system Rs 20.95 per litre, and cooking gas Rs 303.66 per cylinder.

Multiple factors

The surge in global crude prices have been propelled by multiple factors including a surprise fall in US crude oil stock and the Organisation of Petroleum Exporting Countries’ decision not to raise supplies.

The Indian crude oil basket has averaged $97.66 a barrel so far this month as against $92.37 a barrel in February, and $89.52 in January.