The price of the Indian crude basket has leaped 51.5% in as few as 20 days – fueling concerns about state-run oil marketing companies (OMCs). The sudden surge in crude oil prices could translate into further pressure on OMC finances, their fuel marketing margins, working capital needs and the overall import bill.
The sudden spike in India’s benchmark crude basket comes at a time of extreme geopolitical tension that is causing wide swings in global oil markets. As India imports about 90 percent of the crude required for its vast energy demands, an international oil- price escalation brings its share of economic and fiscal woes, hurting companies like Indian Oil Corp. (IOC), Bharat Petroleum Corp.
(BPCL) and Hindustan Petroleum Corp.
(HPCL), apart from its own bottom lines.
Indian crude basket witnesses steep spurt in just 20 days
The Indian crude basket, a benchmark figure which refers to the average of crude oil grades imported and refined by Indian oil companies, has spiked sharply over just 20 days – rising by as much as 51.5% in a short span, rekindling pressure on the finances of India’s OMCs.
Calculated on the basis of a mix of crude grades that includes Dubai, Oman and Brent-linked oil prices, as India imports crude for its downstream operations, a jump in international prices directly means an increased cost for the primary input into their business. That raises questions about possible cuts in marketing margins and even bigger financial pressure for its fuel retailers.
Here’s why higher crude prices hurt OMCs
Oil marketing companies, or OMCs, in India have businesses spanning refining of fuel as well as marketing and distribution of transport fuels. A crude oil price rise automatically pushes up input costs for refining and marketing the product. However, the final prices to end users of products – such as petrol and diesel – aren’t always marked up in line with international oil prices.
This leaves the companies in a bind. If petrol and diesel prices aren’t adjusted in step with rising oil costs and rupee depreciation for crude purchases, the difference becomes what they have to bear, leading to reduced marketing margins or under-recoveries that strain financial health. The sharp rise in the Indian crude basket could, thus, impact the profits of state-controlled OMCs if the trend continues.
HPCL, BPCL, IOC brace for increased financial duress
Given the vertical integration and scale of operations for state-controlled OMCs like Hindustan Petroleum (HPCL), Bharat Petroleum Corp. (BPCL) and Indian Oil Corp. (IOC) in refining, marketing and distribution of fuels, they are particularly sensitive to fluctuations in crude oil prices.
Higher prices means that cost of importing the key raw material has increased significantly, as does the working capital requirement for crude refiners, alongside the risk that inventory of fuels can get devalued quite swiftly in a volatile market.
The potential downside on marketing margins and cash flows if the retail fuel prices cannot move in line is massive.
Geopolitical factors push crude prices to higher realms
This surge in the price of crude has been underpinned by the escalating tensions in different parts of the world and uncertainty over the flow of oil to major energy- consuming nations, the world supply lines of crude oil could face unprecedented interruptions in coming days if the tensions flare up further.
For instance, a trade war is ongoing between oil rich Middle East and Western world after the ongoing Iran-USA geopolitical dispute involving the strait of Hormuz. As it lies on important waterway for trade, a military conflict in Hormuz can easily interrupt transport of oil. Tense developments related to other crude oil- exporting regions are also giving cause for concern for security of supply.
Broader economic and inflation implications for India
India’s crude oil prices have a bearing on the broader economy on many levels – the national’s import bill swells considerably each time the oil prices spurt and it also affects current account balances. Also, a rising rupee would be beneficial to import crude from India’s import-export perspective when its oil price rises due to dollar strength when currency depreciates. And not to mention a hike in domestic energy price will lead to increase in transportation and communication costs, which can eventually translate into rising retail inflation.
What impact would a sustained oil-price rise have on petrol prices?
Now with Indian crude oil prices rising more than 50% since 20 days, how would it reflect on petrol and diesel prices to the consumers of this country? On a quick estimation, one can gauge a significant rise in petrol prices that likely will be more than what had already gone into effect prior. For now, all the more, we, as commoners are at the mercy of OMCs’ pricing strategies, and if an increment occurs in oil imports price then we must prepare to bear the extra cost over prices of the retail pumps.
For a continuing up-swing in the international crude oil market we may expect to endure heavy price hike.
OMCs are, however, expected to carefully balance fuel prices with market conditions for consumer protection. However, a cool off in oil prices from global level may offer respite to OMCs as prices of petrol may soon stabilize or even go down after sometime.
What investors should watch:
For the current and next few quarters the investors can track the changes in international crude oil rates along with refining and marketing margins of IOC, BPCL and HPCL. These OMCs could also be at receiving end from the geopolitical shocks that are hitting the global markets.
Indian policymakers must be particularly cautious on not allowing a sustained escalation in crude oil prices given the huge negative impact of increase in the national current account deficit. The country must also act to support those most likely impacted such as vulnerable poor consumers as well as small businesses or OMCs which are showing significant financial under-recoveries due to high crude and retail price imbalances.
