Since the windfall tax was imposed about two weeks ago, the realised spread on diesel and gasoline has fallen to near loss-making levels while the realisation on aviation fuel and crude has gone below 15-year averages. 

This comes on the back of a cool-off in crude prices from the peaks in June. According to analysts, this questions the need for continuation of the windfall tax. 

“We expect a rethink in one of the fortnightly reviews promised by the government if current prices continue. Any relaxation would be a big trigger for ONGC and Oil India and a relief for Reliance,” said Vikash Kumar Jain, Analyst at CLSA. 

Price crash

The last few days have seen a reasonably large fall in crude prices as well as spreads for key refined products on the back of rising worries over oil demand as recession fears grow. As a result, the refining spread for diesel has almost halved from the peak seen in June 2022 of $55-60 per barrel (bbl) to $30 per bbl. “Similarly, ATF spreads have crashed from $50-55 per bbl to $25-30 per bbl. Gasoline spreads have also been slashed from $30-35 per bbl last month to $10-15 per bbl. At the same time, the Brent crude price has also cooled off by $15-20 per bbl in the past 2-3 weeks to about $100 per bbl.

“These quick and dramatic fall in crude and product spreads significantly reduces any ‘super-normal’ gains for refiners as well as crude oil producers and possibly questions the need of the continuation of the windfall tax imposed about two weeks ago,” Jain said. 

The spot refining spread of gasoline has fallen near the 15-year average. A $12 per bbl windfall tax on this takes the realised refining spread down to a near loss-making level of just $2 per bbl. Similarly, the diesel spread after the export tax of $26 per bbl would be a meager $2 per bbl. Although the spot Brent crude and ATF spreads are still above 15-year averages, post-windfall tax these imply realisations way below their 15-year averages.

‘Extraordinary step’

Earlier this month, the government levied an export tax on petrol, diesel and jet fuel (ATF) shipped overseas by firms like Reliance Industries Ltd, as also a windfall tax on crude oil produced locally by companies such as ONGC and Vedanta Ltd. The government imposed a ₹6 per litre tax on the export of petrol and ATF and ₹13 per litre tax on export of diesel, finance ministry notifications showed.

Additionally, it levied a ₹23,250 per tonne tax on crude oil produced domestically.

“At the time of announcing the windfall tax, government officials took pains to explain this should be seen as an extraordinary step at a time of super-normal gains for oil companies. They also promised a review of this tax every 15 days. With the next review due later this week, this sharp decline in global prices may force a rethink,” CLSA said. 

“One may not expect the government to react so quickly but we see a good chance for relief in one of the subsequent reviews this quarter if price remains around current levels. If this tax remains for long, we fear it may hamper the positioning of this government as an export- and manufacturing-friendly regime,” Jain added.