Economy

Petrol price hike fails to cheer OMC stocks

Anand Kalyanaraman | Updated on May 16, 2011

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The steep hike of Rs 5 a litre in the price of petrol, effective Sunday midnight, did little to help the stocks of the oil marketing companies (OMCs). HPCL, Indian Oil and BPCL lost 0.65 per cent, 0.79 per cent and 1.08 per cent respectively in Monday's trade.

The markets seemed unsatisfied by the quantum of increase. The price hike was only around half of what OMCs should have raised to neutralise their mounting under-recoveries on petrol.

Even after the latest price hike, OMCs are set to suffer under-recoveries of around Rs 8,000 crore from the sale of petrol in FY-12. Given that the price of petrol has been officially ‘deregulated' since June last year, it remains to be seen whether the oil marketing companies will be compensated for under-recoveries on the fuel by the Government or the upstream oil companies.

Although the Government had freed the pricing of petrol last June and made it market-linked, in practice, oil marketing companies have been increasing prices only after receiving the Government's tacit nod.

As a result, thanks to a combination of economic and political factors including high inflation and major State elections, they have held back from raising prices real time despite a steep increase in price of crude oil this year.

The recent culmination of elections in important States has provided the political window for OMCs to increase petrol prices. Yet, stubborn inflation and fears of a political backlash has prevented the Government and in effect the oil marketing companies from going the whole way.

Mounting under-recoveries

Also, of bigger concern for the OMCs, are the mounting under-recoveries on diesel, LPG and kerosene. Prices for these fuels, which are still regulated, have not been touched since June last calendar.

At present, OMCs are losing around Rs 18 a litre on diesel, Rs 30 a litre on kerosene and Rs 330 a cylinder of LPG. Diesel, whose consumption is being given a boost by the rising prices of petrol, is expected to account for the bulk (said to be around 65 per cent amounting to Rs 1,16,000 crore) of the under-recoveries in the current fiscal.

While a hike in diesel price is also said to be on the anvil, the quantum of the increase needs to be watched out for.

In addition, the recent approval of an additional Rs 20,000 crore by the Government as cash compensation for under-recoveries in the last fiscal may prove insufficient, with the OMCs just about managing to keep their heads above water.

Published on May 16, 2011

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