How OMCs in India are tackling rising fuel costs
What's the story
In a major development, Indian state-owned oil marketing companies (OMCs) have decided to cut the prices they pay refineries for petrol, diesel and other fuels. The move is aimed at reducing the financial burden of fixed retail fuel prices. As a result, refiners will have to bear some of the additional costs from the global oil market. Independent refineries will be most affected by this decision.
Pricing strategy
OMCs set to incur losses
On March 26, the OMCs fixed rates for petroleum products at a discount of up to ₹60 per liter from their import cost. The discounted rates, effective from March 16, will mostly affect standalone refiners such as Mangalore Refinery and Petrochemicals Ltd (MRPL), Chennai Petroleum Corporation Ltd (CPCL), and HPCL-Mittal Energy Ltd (HMEL). The decision comes as international oil prices have surged from around $70 per barrel to over $100 due to the Middle East conflict.
Financial implications
Retail fuel prices in India unchanged
Despite the rise in international oil prices, retail petrol and diesel prices in India have remained unchanged. This has forced OMCs to absorb the impact. With no end to the conflict in sight, OMCs have decided to fix a discount on refinery transfer price (RTP): the internal price at which refineries sell fuel to marketing arms. This is aimed at paying refineries less than the import-parity cost of fuels like petrol and diesel.
Price adjustments
Discount on diesel for March and April
For the second half of March, a discount of ₹22,342 per kiloliter (₹22.34 per liter) was fixed on diesel to bring down the RTP from ₹85,349 per kl to ₹63,007 per kl. For April's first fortnight, the discount on diesel has been set at ₹60,239 per kl to lower RTP from ₹146,243 per kl to ₹86,004 per kl. The RTP for aviation turbine fuel (ATF) and kerosene has also been slashed after considering discounts.
Market effects
Integrated state-run firms may offset some hit
The discounted pricing will prevent refiners from fully passing on the higher crude costs via RTP, forcing them to absorb part of the impact of elevated global oil prices. While integrated state-run firms can offset some hit between the refining and marketing operations, standalone refiners relying on the market-linked RTP for revenue could face a sharper margin squeeze. This move would also affect private players such as Nayara Energy and Reliance Industries if the discount is implemented for them too.