Shares of oil marketing companies (OMC)—Hindustan Petroleum Ltd (HPCL), Indian Oil Company (IOCL), and Bharat Petroleum Corporation Ltd (BPCL)—slipped on Friday, December 29. The selling pressure was triggered after sources suggested that the government was likely to cut the prices of petrol and diesel ahead of the general elections.

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At around 9:54 a.m., shares of HPCL were down over 3 per cent, BPCL slipped over 2 per cent and IOCL declined over 1 per cent. 

On Thursday, after market hours, as per sources, the Petroleum Ministry prepared a proposal incorporating the price cuts for petrol and diesel ranging from Rs 10 to Rs 8 per litre.

The rationale for the Ministry’s proposal for huge reductions is the sharp drop in the purchase price of imported crude oil that goes into refineries to produce petrol and diesel. The proposal is awaiting PM Narendra Modi's approval, as per sources.

Also Read: Exclusive: PM to announce massive cuts in petrol, diesel prices before year-end

According to sources, the Petroleum Ministry has prepared a proposal incorporating the cuts ranging from Rs 8 to Rs 10 per litre in both fuels for the Prime Minister’s approval which could come on Thursday.

How will the move affect OMCs?

As per Zee Business Research, with the reduction in prices of petrol and diesel, OMCs may suffer inventory losses in the third quarter. The research further suggests that currently, the prices of petrol and diesel are fair compared to the crude oil price of $80 to $85. The average crude oil price in CY23 remained near $82, and the average price of crude oil was around $77 in December.

The problem lies in the price cut of diesel, as OMCs' diesel margins have suffered losses from July to October, as they were negative $5 to $8 in that period.

Madhavi Arora, Lead Economist, Emkay Global Financial Services believes that while there could be a possibility that the government may share the burden of the price cut with OMCs and take a hit on its fiscal to some extent, she estimates that a Rs 4-6 per ltr cut may be comfortably absorbed by OMCs and does not require the govt to bear any hit on its books.

"As per our estimates, currently the diesel/petrol gross marketing margins of OMCs are high at Rs6/11 per ltr, much higher than the normative level of Rs 3-4 /ltr each, hence a Rs 4-6/ ltr cut at the retail level would essentially bring their margins closer to normative levels, without hitting their profitability as such," said Arora.

She added this makes the case of a price cut in the range of Rs 4-6/ ltr much stronger and easier to implement, and the probability of higher cuts of 10/ltr seems low. If it does happen, this would eat away even the normative margins of OMCs, unless burden-shared by the govt. Emkay Global Financial Services notes each Rs 1 /ltr excise cut currently costs the exchequer Rs 155-160 billion on an annualised basis.

 

 

 

 

Petrol and diesel price trend 

The government reduced excise duty in November 2021 and May 2022. No change was made in petrol and diesel prices after April 2022. Currently, there is a 20.6 per cent excise on petrol and a 17.6 per cent excise on diesel.

Marketing margin

 

Level $ Petrol Margins Diesel Margins
75 12 7
77.5 11 6
80 9 5
85 6.5 1.5

OMC share price: Past performance

Since January 2023, shares of HPCL have gained over 69 per cent, BPCL shares have risen over 35 per cent and IOCL shares have soared over 66 per cent against the Nifty 50's rise of over 19 per cent. 

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