Over the last 6 months, there has been a sharp fall in the stock prices of downstream oil companies like HPCL, BPCL and IOC. In fact, BPCL has corrected 17% while IOCL has corrected 19% with the worst performer being HPCL, which has corrected 27%. For a very long time, these oil marketing companies were the darling of the stock markets. They had everything going in their favor. Refining margins were high, OMCs were benefiting from rising inventory value and free pricing was helping them to pass on crude price hikes to customers. What has changed in the last few months for these OMCs?
All about refining margins…
Most oil marketing companies have managed to maintain attractive refining margins despite higher crude prices. However, the global trend in refining margins is changing and with higher crude prices, the pressure on the refining front is likely to increase. Over the last few quarters the OMCs also benefited from higher inventory valuations as the price of the crude basket was marked up. That advantage also appears to be reducing for the OMCs. Crude oil prices appear to be headed higher with the Saudi prince already talking about $80/bbl for Brent Crude. Saudi Arabia will be keen to ensure higher crude prices ahead of their Aramco IPO. That means, refining margins will be under increasing pressure in the coming months.
Skimming away falling prices
Between late 2014 and early 2016 when the price of crude was falling from $115 to $30/bbl, the government managed to increase its revenues by imposing a total of 9 excise duty hikes on petrol and diesel. Post 2016 there was only 1 excise duty cut. In other words, the government skimmed most of the fall in crude prices in the form of higher revenues. That explains why the petrol price in Delhi today is almost the same as September 2014 when crude prices were nearly 45% higher. With states refusing to cut the cess and the central government ruling out excise duty cuts, what is the way out?
Load it on the OMCs…
When free pricing of petrol and diesel was introduced, the real reason for its success was low crude prices. With crude prices now threatening to get back to $80/bbl, the government has already asked the OMCs to absorb the Rs.1 hike in petrol prices. For the fiscal year ended March 2018, OMCs are expected to take a subsidy burden of Rs.25,000 crore on account of petrol and kerosene. With elections coming up in key states and at the centre next year, the government would not want to risk popular resentment by hiking petrol prices beyond a point. With central and state finances under pressure, the only option seems to be to load it on to the OMCs. Not good news for OMCs!
