Fuel prices rose, Indian oil companies lost revenue
Top retailers of India such as Bharat Petroleum, Indian oil corporation, and Hindustan Petroleum Corporation Limited together have lost about $2.25 billion in revenue from November to March as petrol and diesel prices remained unchanged despite a sharp rise in crude oil prices, Moody’s Investors Service said on Thursday.
Gasoline and diesel prices were unchanged from the month of November to March, the prices of crude oil, which is the raw material for fuel production, averaged $111 per barrel for several months in the first three weeks of March, compared with around $82 at the beginning of November.
On the 22nd and 23rd of March, Indian State Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation raised petrol and diesel prices by eighty paise per litre but suspended the increase on Thursday.
Moody’s said in a statement that based on the current market prices, oil marketers are currently losing revenue of approximately US$25 which is about 1,900 in Indian currency per barrel, and US$24 per barrel on sales of petrol and diesel.
Moody added if the prices of crude oil continue to average around $111 per barrel, then the top-rated companies of India will incur a combined daily loss of about $ 65-70 million on gasoline and diesel sales. He said until the prices of fuel are accelerated to compensate for the price of crude oil, the companies will continue to bear the loss.
It was further added by Moody’s that our estimates for average sales done on the basis of November 2021 in the first three weeks of March 2022 state-owned refiners and marketing companies jointly lost approximately $2.25 billion in sales revenue of gasoline and diesel.
It amounts to approximately 20% of the combined FY2021 EBITDA for all three companies.
In India, the fuel prices were deregulated, and refiners can pass the increased costs on to consumers. The drastic price increases required in the current oil price environment will be realized with government coordination and entail a reduction in excise taxes.
He said that we expect the government to allow refineries to adjust prices appropriately and avoid a situation where refineries continue to experience losses of this level for an extended period.
Moody’s said that observing the increase in price for two days underlies expectations that the price will be increased gradually instead of increasing the price in one go.
“In the meantime, refiners and marketers will be able to cover the increase in raw material costs due to price increases or excise tax reductions, or both, they will have to continue to absorb some of it, he said.
The continued rise in crude oil prices will also translate into inventory valuation gains for refiners, which should mitigate some of the impacts on falling selling prices.
The rating agency said that the combination of higher borrowing with weaker earnings would diminish the credit metrics.
He said that an increase in the price of crude oil would affect the state-owned refining and marketing companies because of the recently concluded elections in 5 states of India held from the 4th of November 2021 to the 21st of March 2022.
However, oil prices’ high performance will have a mixed effect on the sector. While upstream producers such as ONGC and OIL will benefit from higher prices than profits, downstream players such as IOC, BPCL, and HPCL will be negatively affected by increased input material costs and increased working capital requirements.
While most state-owned oil companies in India are currently developing strategies to manage the risks associated with the carbon transition, these strategies are still relatively burgeoning.
Most companies don’t have a firm capital allocation to move to cleaner energy sources and diversify away from traditional fossil fuels, said Moody’s. The projected timeline for achieving carbon neutrality is not yet announced by the companies like ONGC, OIL, and IOC.
The persistently high oil price environment will encourage consumers to switch to other energy sources. Although the consumption growth has started reducing in India, it is expected that oil and gas prices will continue to grow because of the huge dependency of India on Fossil Fuels and development needs.
If the demand starts declining in India, it will primarily reduce imports before reducing domestic production, he added.
Edited by Prakriti Arora