Refining margins to offset oil company losses on maintaining fuel prices: Fitch

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Oil company losses could be offset by their refining margins, says Fitch Ratings

New Delhi:

State-owned fuel retailers Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) may incur marketing losses in the January-March 2022 quarter for maintaining gasoline and diesel prices despite rising costs, Fitch notes announced on Tuesday.

However, he added that strong base refining margins and windfall inventory gains should mitigate potential near-term losses.

The three fuel retailers kept gasoline and diesel prices unchanged for a record 137 days between November 2021 and March 2022 despite rising nearly $27 a barrel in crude oil prices. The three companies raised tariffs by 10 rupees a liter over 16 days from March 22 before hitting a pause button again.

“Retail prices of gasoline (petroleum) and gasoil (diesel) in India, and hence petroleum marketing company (OMC) marketing margins, are expected to remain in line with the development of crude oil prices over the long term, despite sporadic periods of steadily growing retail prices amid heightened oil price volatility,” Fitch said in a note.

The correlation of retail fuel prices with the 15-day moving average of crude oil prices (benchmark price) has remained high at 93% since the start of the COVID-19 pandemic in January 2020.

The correlation excludes the retail price impact of excise duty changes and includes periods when OMCs did not immediately pass the movement in oil prices on to consumers, he said.

“CMOs benefited from strong marketing margins during periods of low oil prices (March-June 2020) and came under pressure on margins during high oil prices (November 2021-March 2022) as they attempted to keep fuel prices affordable,” he said.

However, the period from November 2021 to March 2022 was the longest retail price freeze despite benchmark crude oil prices increasing by nearly $27 per barrel (or Rs 13 per liter) over the period. .

This “could lead to marketing losses for OMC in the fourth quarter of the fiscal year ending March 2022,” he said, adding that retail fuel prices were only subsequently increased. only around 10 rupees, implying that further price increases may be needed for marketing. margins to reach pre-November levels, and marketing margins at the start of 2022-23 could also be under pressure.

“We believe that strong core refining margins and windfall inventory gains should mitigate potential near-term marketing losses, and OMC may see opportunities to recoup some of the losses as oil prices decline. , if and when it happens,” he said. .

Fitch said it expects such instances of indirect state interference in fuel prices to be temporary and their impact on the Autonomous Credit Profiles (SCPs) of the three CMOs to be neutral in the long run. term.

“However, if crude oil prices continue above Fitch’s baseline assumptions, record retail fuel prices could limit the extent to which changes are passed on, putting pressure on credit metrics for WTO”, he said without giving the reference price.

Fitch believes retail fuel pricing freedom remains a key area, requiring clarification before the government‘s proposed divestiture of BPCL can be completed.

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