Fuel price hike unlikely despite oil price surge as polls loom: Moody’s
Petrol and diesel prices are unlikely to be raised despite stable commodity costs due to next year’s general elections, Moody’s Investors Service said.
Three state-run fuel retailers – Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) – which control roughly 90 percent of the market, have kept petrol and diesel prices frozen for a record 18 consecutive months.
This comes despite a spike in commodity (crude) costs last year, which led to heavy losses in the first half of the 2022-23 fiscal year, before falling oil prices pushed them into profit.
International oil prices have risen since August, causing margins at three retailers to turn negative again.
“High crude oil prices will weaken the profitability of India’s three state-owned oil marketing companies – IOC, BPCL and HPCL,” Moody’s said in a report.
“The three companies will have limited flexibility to pass on higher input costs by increasing the retail selling prices of petrol and diesel in the current fiscal year due to the upcoming elections in May 2024.”
OMCs’ marketing margins – the difference between their net realized prices and international prices – have already weakened significantly from the high levels seen in the quarter ended June 30, 2023 (first quarter of fiscal 2024). Diesel marketing margins have turned negative since August, while petrol margins have shrunk significantly over the same period as international prices rose.
“The increase in raw material costs comes as the price of crude oil jumped about 17 percent to above USD 90 per barrel in September, from an average of USD 78 per barrel in the first quarter of fiscal 2024,” Moody’s said. “The extension of production cuts by the Organization of the Petroleum Exporting Countries (OPEC) by about 1 million barrels per day until December 2023, combined with Russia’s extended export cuts of about 300,000 barrels per day over the same period, led to rising oil prices. “
However, high oil prices are unlikely to last long as global growth weakens, the report said.
“The decline in OMC marketing margins was mitigated to some extent by the increase in gross refining margins (GRM). Benchmark GRMs in Singapore have improved since June in part due to continued growth in liquid fuels consumption in the region, as well as planned refinery outages that have constrained supplies of petroleum products in the region,” it said.
The rating agency expects GRM and international transportation fuel prices to decline in the coming quarters as concerns about China’s economic slowdown reduce demand while supply increases as refineries come back online after completing planned maintenance activities.
“Although a smaller gap between international and domestic prices will reduce marketing losses for OMCs, their overall profitability will remain weak as retail prices are likely to remain flat,” he adds.
After very strong earnings in the April-June quarter, OMC operating results are expected to weaken over the next 12 months as oil prices remain at current high levels.
“However, the three companies’ earnings for fiscal 2024 (April 2023 to March 2024) will remain strong and higher than historical levels, even if crude oil prices remain at current levels of USD 85 per barrel until USD 90 per barrel in the second half of fiscal 2024.
“This is due to OMC’s extremely strong earnings in the first quarter of fiscal 2024. The EBITDA of the three companies in the first quarter alone was close to their average annual EBITDA over the past several years,” Moody’s said, adding that OMC will begin to receive EBITDA losses in the second half of fiscal 2024 if crude oil prices rise to around USD 100.
Strong gasoline and diesel marketing margins contributed to solid operating performance in the first quarter of fiscal 2024.
OMC’s net realized selling prices for diesel and gasoline were largely unchanged from April 2022, although raw material costs declined steadily. The price of Brent crude fell to USD 78 per barrel (bbl) in the first quarter of fiscal 2024 from USD 112 in the first quarter of fiscal 2023.
Among the three OMCs, IOCL and BPCL are better positioned to withstand any further increase in crude oil prices compared to HPCL, the rating agency said, adding that the difference in the OMCs’ capacity to absorb increases in raw material costs stems from from the difference in their business profiles.
The larger scale operations of IOCL and BPCL and the high degree of integration between their refining and marketing segments enable them to withstand the impact of adverse changes in the operating environment. IOCL’s presence in petrochemicals and pipelines also reflects the diversification of the business. Meanwhile, HPCL’s smaller scale and greater reliance on its marketing operations make it more vulnerable to any adverse price movements.
“Strong earnings in the first quarter of fiscal 2024 and lower crude oil prices compared to fiscal 2023 reduced OMC’s working capital requirements and allowed them to reduce their borrowing over the past few months. As a result, we expect leverage as measured by debt/EBITDA for all three companies to remain well positioned against rating thresholds in fiscal 2024. This is despite capex and shareholder payouts remaining high and rising crude oil prices , leading to increased working capital requirements during the period,” it said.
Meanwhile, the Indian government’s Rs 30,000 crore capital support for the oil marketing sector, announced in the budget earlier this year, will boost cash flows for OMCs and partially cover their capital expenditure needs. To this end, IOCL and BPCL have already declared rights issues to the government.
Moody’s said it had not factored that into its forecasts, however, as the timing and amount of that revenue remained uncertain at this point.
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