“Retail prices of gasoline (petroleum) and gasoil (diesel) in India, and hence petroleum marketing company (OMC) marketing margins, are expected to remain in line with the development of crude oil prices over the long term, despite sporadic periods of steadily growing retail prices amid heightened oil price volatility,” Fitch said in a note.
The correlation of retail fuel prices with the 15-day moving average of crude oil prices (benchmark price) has remained high at 93% since the onset of the COVID-19 pandemic in January 2020.
The correlation excludes the impact on retail prices of changes in excise duties and includes periods when OMCs did not immediately pass the movement in oil prices on to consumers, he said.
“CMOs benefited from strong marketing margins during periods of low oil prices (March-June 2020) and came under pressure on margins during high oil prices (November 2021-March 2022) as they attempted to keep fuel prices affordable,” he said.
However, the period from November 2021 to March 2022 was the longest retail price freeze despite benchmark crude oil prices increasing by almost USD 27 per barrel (or Rs 13 per litre) during the period.
This “could lead to marketing losses for OMC in the fourth quarter of the fiscal year ending March 2022,” he said, adding that retail fuel prices were only subsequently increased. only around 10 rupees, implying that further price increases may be needed for marketing. margins to reach pre-November levels, and early FY23 marketing margins may also be under pressure.
“We believe that strong core refining margins and windfall inventory gains should mitigate potential near-term marketing losses, and OMC may see opportunities to recoup some of the losses as oil prices decline. , if and when it happens,” he said. .
Fitch said it expects such instances of indirect state interference in fuel prices to be temporary and its impact on the Autonomous Credit Profiles (SCPs) of OMC – Indian Oil Corporation ( IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPLC) – to be neutral over the long term.
“However, if crude oil prices continue above Fitch’s baseline assumptions, record retail fuel prices could limit the extent to which changes are passed on, putting pressure on credit metrics for WTO”, he said without giving the reference price.
Fitch believes retail fuel pricing freedom remains a key area, requiring clarification before the government’s proposed divestiture of BPCL can be completed.
“India has traditionally used its control over MOCs to drive its socio-political agenda, affecting the competitiveness of private fuel retailers, who with a 10% market share have limited pricing power and align their retail prices on MOCs.
“We expect private fuel retailers to increase their exports at better margins during periods when domestic margins are under pressure,” the rating agency said.
India’s diesel exports increased by 12% year-on-year in January-February 2022.
The ratings agency said the three fuel retailers are driven by the high likelihood of parental support, based on strong and ongoing ties.