The demand to reduce retail prices for petrol and diesel gained momentum as international crude oil prices dipped below $80 per barrel last week, stabilising in the $76-77 range. This push is reinforced by the impressive performance of oil marketing companies (OMCs) from April to September 2023 and the retail inflation in November 2023 staying within the Reserve Bank of India’s (RBI) comfort zone.

A senior government official said, H1 FY24 has been profitable for the OMCs against H1 FY23 pushing the case for a price cut, which could take place by January 2024.

“There was discussion on fuel price revision during the Budget (vote on account) consultation process of Ministries, but at that point oil prices were volatile and around $81-82 per barrel. Now they have fallen to below $80, which is in the OMC’s comfort level. The price cut could be more for petrol as the margin gain is higher, and can be utilised to partially compensate for losses in diesel margins,” the official said.

It is not immediately clear whether there will be a cut in excise duty, like in November 2021 and May 2022, or the government will resume the daily fuel price revision exercise, which has been suspended since April 6, 2022.

A senior official with an OMC said for retail prices of auto fuels to be cut, international rates should sustain below $80 per barrel.

“At present, there is a case for price cut considering inflation is down, global prices are in $76-77 range and OMCs are in a more comfortable position financially than in H1 FY23. However, there is considerable volatility in the market due to uncertainty over global demand. If prices sustain even at $80 into the new year, it will further support the price cut narrative,” the official explained.

Marketing margins of OMCs would be impacted if Brent sustains at $85 per barrel, the source said.

Trade sources said that OPEC+ will aim to keep prices in the $80 per barrel range, which is the fiscal break-even price for Saudi Arabia, the world’s top crude oil exporter.

OMCs performance

According to JM Financial’s December 2 report, at spot Brent price and actual product cracks, OMCs’ gross auto-fuel marketing margin has risen to ₹6.4 per litre (vs historical margin of ₹3.5 a litre) and gross auto-fuel integrated margin has gone up to ₹15.2 per litre (vs historical margin of ₹11.4).

Similarly, Prabhudas Lilladher in a November 30 report expects OMCs — Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — to witness a strong Q3 FY24 on the back of improvement in gross marketing margins (GMMs) on petrol and diesel.

Singapore gross refinery margin (GRM) fell to $9.6 per barrel in Q2 FY24 to $3.8 in October 2023, but appreciated to $5.3 a barrel in November. For Q3 FY24 till date, it stands at $4.5, it said.

OMC’s GMMs on petrol and diesel in Q2 FY24 stood at ₹7.6 per litre and ₹1 a litre, respectively. Gross margins on diesel, which were negative in August-October 2023, turned positive in November.

“GMM on petrol stands at ₹8.2 a litre in Q3 till date, while there is a gross marketing loss of ₹0.6 a litre on diesel. In the week ended November 28, GMMs on petrol and diesel stood at ₹9.7 a litre and ₹4.7, respectively. However, sustainability of higher-than-normalised GMMs is questionable in light of the upcoming elections,” the brokerage added.

Volatile prices

Trade sources said the market is expected to be choppy influenced by concerns about declining global manufacturing activity, slowing consumer demand, interest rate cuts, weakening US dollar and lower rig count, among other factors.

However, crude oil price is getting support from production cuts by OPEC+ members of around 2.2 million barrels per day (mb/d) in Q1 2024 and the International Energy Agency (IEA) increasing its projections for world oil consumption in 2024 by 130,000 barrels per day to 1.1 mb/d. Against this, the Organization of the Petroleum Exporting Countries’ (OPEC) demand forecast is 2.2 mb/d, said one of the sources.

Another trade source said gains are limited as the market is also factoring in non-OPEC crude supply from countries such as the US, Brazil, Kazakhstan, Norway, Guyana and Mexico.