Oil companies will need to hike petrol, diesel prices by at least ₹12 per litre, says ICICI Securities

Petrol and diesel prices need a massive price hike of up to ₹15.1 per litre by March 16 after being frozen for an unprecedented 120 days, estimates a recent analyst report. The recommended price hike takes into consideration the dismal margins of Indian oil marketing companies, which nosedived as crude oil prices reached new highs on the back of ongoing geopolitical tensions between Russia and Ukraine.

A report by ICICI Securities projects that oil marketing companies need to hike prices of transportation fuels by ₹12.1 per litre on or before March 16 just to break even, and ₹15.1 litre to manage a net margin of ₹2.5 per litre.

“We believe steep price hikes are required as the strength in gross refining margin (GRM) does not suffice for sharp QoQ fall in net auto fuel marketing margin,” the report states.

International oil prices, which are directly followed by domestic petrol and diesel prices, have been on the rise for the past two months. As per the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry, the basket of crude oil, India buys rose to ₹117.39 per barrel on March 3, the highest since 2012. The average price for the same in early November last year stood at ₹81.5 per barrel when the prices of petrol and diesel were frozen.

Keeping the prices unchanged, as five states – including Uttar Pradesh and Punjab – went to polls, has severely hurt the margins of oil marketing companies (OMCs) and the situation is set to further deteriorate, the ICICI Securities report suggests.

OMC Margin’s squeezed as crude rises

As per the report, the auto fuel net marketing margin stood at minus ₹4.92 per litre on March 3 and ₹1.61 per litre in Q4 FY22-to-date. 

However, at the latest international auto fuel prices, the net margin is expected to plummet to minus ₹10.1per litre by March 16 and minus ₹12.6 a litre by April 1.

Assuming international prices remain unchanged, net auto fuel marketing margin likely steeply declines to be ₹1.9 per litre in FY22, compared to ₹2.7 per litre in FY22 to date, and minus ₹1.3 per litre in Q4 FY22E, against ₹1.6 per litre in Q4 FY22 to date.

Crude oil prices have been rising since Russia stationed its forces on the Ukraine border last month. The uptick quickened after the oil-producing nation invaded its neighbour on fears of supplies from Russia being disrupted due to its conflict with Ukraine or the subsequent sanctions by western countries.

How Much does India Depend on Russian Oil?

Russia accounts for a third of Europe’s natural gas supply and 10% of global oil production. About one-third of Russia’s gas supplies to Europe usually travel through pipelines crossing Ukraine.

But India doesn’t rank among major importers of Russian oil. 

India imported 43,400 barrels of oil from Russia in 2021, around 1% of its overall oil imports. Coal imports from Russia to India in 2021 stood at 1.8 million tonnes, making up 1.3% of all coal imports. India also buys 2.5 million tonnes of LNG from Russia’s Gazprom.

While supplies from Russia are not a concern for India, the steep rise in oil prices due to the Russia-Ukraine war has stirred troubles for oil companies at home. 

Oil prices, benchmarked to the international crude oil prices, have not been changed for the past four months even as the latter continues to race ahead.

 Petrol and diesel prices are supposed to be revised daily to replicate the changes in crude prices, but government-owned Indian fuel retailers – Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) – had frozen rates as campaigning for assembly elections in five Indian states began.

Costlier Oil to weigh on Govt finances

High crude oil prices can cost the government around ₹1 lakh crore in the next financial year if the Centre continues to levy the reduced excise duty on petrol and diesel, according to a report by SBI Research. While the price of Brent crude jumped over $120.

The government had cut excise duty on petroleum products in November 2021 to prevent the prices of petrol and diesel from rising. Several states had also reduced the VAT rates on transportation fuels. The relief was given as both petrol and diesel reached new peaks – going beyond the ₹100-per-litre mark in several states – due to the rise in Brent crude prices. 

However, if the government reduces the excise duty on petroleum products further by ₹7 per litre and prevent the prices of petrol and diesel from rising, then it will incur an excise duty loss of ₹8,000 crore per month, the report says. "And if we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10% in FY23, then the revenue loss of the Government would be around ₹95,000 crore to ₹1 lakh crore for FY23."

The report further says that if crude oil prices are at an average of $100/bbl. inflation is likely to increase by 52-65 basis points. Every $10/bbl increase in Brent crude price will lead to an increase in inflation by 20-25 bps, it adds.

India’s crude oil imports were up 119.2 per cent on a year-on-year basis to $118.3 billion during April-December 2021, up from the $54 billion during the same period in FY21. At this rate, India’s oil import bill is expected to be around $158 billion in FY22, just a notch below the all-time high of $165 billion in FY14.

Inflation and Interest rates

India's headline inflation rate based on the Consumer Price Index (CPI) jumped to 6.01 per cent in January 2022, as per data released by the National Statistical Office on February 14.

The RBI has said that the retail inflation would be around 4.5 per cent in the entire year 2022-23 with an assumption that oil prices will remain below $75 a barrel. 

In order to support growth, the RBI has kept the policy rate benchmark, the repo rate, unchanged at 4 per cent for more than two years. (The repo rate is the rate at which banks borrow funds from the RBI to meet their daily temporary mismatches.)

The RBI had kept the repo rate unchanged despite the consumer price index (CPI) being 5.3 per cent in 2021-22, which is closer to the MPC's higher band at 6 per cent. 

The RBI’s monetary policy committee (MPC) targets an inflation rate or CPI of 4 per cent with a band of 2 to 6 per cent.

The RBI's accommodative stance, as well as its moderate inflation forecast of 4.5 per cent for 2022–23, is now under threat. One of the six monetary policy committee members Prof Jayanth R Varma has been voting against the RBI's accommodative stance for the last nine months.

"India had no extraordinary monetary accommodation during the pandemic. Brent crude prices are uncorrelated with headline CPI inflation in India (because fuel & light have only a 6.84 per cent weightage in the CPI), but a generalized surge in commodity prices will likely keep India’s CPI inflation above 6 per cent year on year in Mar-Apr’22, nudging the RBI to raise the repo rate by 50bp in Apr-Jul’22," said Prasenjit K. Basu - Chief Economist of ICICI Securities in his recent report.

Currently, oil accounts for more than a fifth of the country's total imports. The only saving grace is the stable value of the domestic currency against the US dollar, despite global turmoil. The RBI has enough foreign exchange to protect the value of the rupee, though the risk of dollar outflow still exists.

India Foreign Exchange reserves

With oil crude prices moving over $120 a barrel, the rupee has come under pressure as higher oil prices will mean a larger import bill. The RBI will intervene in the currency market to reduce volatility. 

The Reserve Bank of India keeps accumulating foreign exchange reserve, which stands at US$634 billion on 31st December 2021. This figure is equivalent to 13.2 months of imports and higher than the country's external debt.

Till the end-November, last year, the country stood at the 4th largest foreign exchange reserves holder globally, after China, Japan, and Switzerland. This accumulation of reserves led to an improvement in external vulnerability indicators such as foreign exchange reserves to total external debt, short-term debt to foreign exchange reserves, etc.