Why are fuel prices expected to climb despite crude oil being at a 6-month low

Global crude oil prices have corrected by almost 30% from a high of $136 hit on March 07, 2022. High-interest rates, recession fears, China's strict COVID policy, and an increase in US crude inventories all contributed to the drop in crude prices.

Currently, WTI crude futures are consolidated around the $89-per-barrel mark, trading near their six-month low. while the price of Brent crude futures was around $94 per barrel.

Data released over the weekend showed that China, the world’s top crude importer, imported 9.5% less oil in July than a year ago as refiners reduced inventories amid slower-than-expected demand recovery. Furthermore, US government figures last week pointed to growing US crude inventories and declining gasoline demand, Tradingeconomics data showed.

Despite crude oil prices trading at a six-month low, fuel prices in India are anticipated to rise in the coming months due to losses experienced by Oil Marketing Companies.

Further, Saudi Arabia, the largest crude exporter is likely to increase the price of its Arab light crude to Asian countries by $10.80 per barrel, HT reported. 

This increase may have an impact on India, which is one of the top importers of crude oil from Saudi Arabia.

State-owned Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) posted a combined loss of ₹18,480 crore on holding petrol and diesel prices despite a rise in costs, PTI reported.

During the April-June quarter of 2022, IOC, BPCL, and HPCL did not revise fuel prices despite a surge in crude oil prices.

The basket of crude oil India imported during the quarter averaged USD 109 per barrel, but the retail pump rates were aligned to about USD 85-86 a barrel, the report said. 

The combined loss of ₹18,480.27 crore is the highest ever for any quarter, including the era when petrol and diesel prices were regulated and the government used to give subsidies to the three retailers.

Adding to the challenges, the government in May cut excise duty on petrol and diesel to give consumers some relief instead of being used to square off mounting losses on fuel sales.

Usually, the cut in excise duty will allow OMCs some leeway to hike retail fuel prices.

In July, ICICI Securities said that OMCs have an estimated loss of ₹10–12 on the sale of a litre of petrol and diesel in the current quarter till the week of June 17, which can be only partly offset by increased refining margins.

It said, in the January-March period, the losses were Rs.1.5 and Rs.1.6 per litre for petrol and diesel, respectively.

On Monday, shares of HPCL, BPCL, and IOC fell up to 4% on the BSE, in an otherwise positive broader market.

Higher operating expenses

Despite a 70% rise in revenues, BPCL posted a standalone net loss of about ₹6,290 crore due to a rise in operating expenses. The company's total expenditure during the June 2022 quarter jumped 87 per cent to ₹1,26,905 crore, compared with ₹67,821.4 crore in the corresponding period last year.

BPCL reported a negative EBITDA of ₹5,901.1 crore for the June-ending quarter. During the first quarter of the last fiscal year, it reported a profit of ₹3,252 crore.

It reported a net loss of ₹6,291 crore for the April-June quarter, due to the hold in fuel prices.

The company earned USD 27.51 on turning every barrel of crude oil into fuel in the quarter, as against USD 4.12 per barrel of gross refining margin a year back.

But this was negated by losses that were incurred because of holding fuel prices despite rising costs.

Similarly, HPCL posted a standalone net loss of ₹10,196.94 crore for the June ending quarter. During the first quarter of the last fiscal year, it reported a profit of ₹1,795 crore.

HPCL's revenue came in at ₹1,14,794 crore, jumping 57 per cent YoY over ₹72,815.4 crore in the April-June quarter last year. However, it reported a negative EBITDA of ₹12,494.6 crore.

The company's total expenditure in the June 2022 quarter increased by 83% to ₹1,26,949.3 crore, up from ₹69,250.4 crore at the same time last year.

According to media reports, the average gross refining margin (GRM) during the quarter that ended June 30, 2022, was $16.69 per bbl as against $3.31 per bbl recorded in the same period last year.

On the other hand, IOC posted a net loss of ₹1,992.53 crore for the June quarter, as against a net profit of ₹5,941.37 crore in the same period a year back.

IOC's revenue was up by 62.47 per cent to ₹2,52,616 crore compared with ₹1,55,619.2 crore in the same quarter last year.

The average gross refining margin (GRM) for the quarter came in at $31.81 per barrel compared to $6.58 per barrel.

IOC's total expenses were at ₹2,50,574 crore, up 74.09 per cent compared to ₹1,43,930.2 crore a year ago.

This is the first quarterly loss in over two years. The company reported a net loss in January-March 2020.

Current freeze on fuel prices is now 123 days old

When the retail price of petrol rose to ₹109.7 as on 1 Nov 2022, the government gave relief to the consumers, for the first time in over three years by reducing the duty. 

Since then, the rate of revision has been paused due to elections in five states, including Uttar Pradesh. After that, state-owned oil firms finally ended a 137-day hiatus in rate revision on March 22.

Petrol and diesel prices rose by ₹10 per litre between March 22 and April 6—the highest-ever increase during a 16-day period since fuel prices were deregulated two decades back.

Recently, in May '22, the government again cut the excise duty on petrol and diesel by ₹8/litre and ₹6/litre, respectively.

The current freeze on petrol and diesel prices, excluding the reduction due to a cut in excise duty, is now 123 days old.

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