How The Cut In Petrol, Diesel Prices Impacts Oil Firms — Profit Explains
The Rs 2 litre price cut, along with the rising Brent crude oil price, stands to impact the gross marketing margins of Indian oil marketing companies.
State-owned Indian marketing companies have implemented their first price cut in almost two years, lowering the retail selling prices of petrol and diesel by Rs 2 per litre each.
The reduction in fuel prices would impact revenue generated by Hindustan Petroleum Corp., Bharat Petroleum Corp. and Indian Oil Corp., directly impacting marketing margins of these companies.
First, What Are Gross Marketing Margins
Gross marketing margin refers to the difference between the retail selling price of fuels like petrol and diesel and the cost incurred by the oil marketing company to procure and deliver the fuel to the pump.
This margin covers various expenses, like transportation costs, storage costs, refinery charges, excise duty levied by the central and state governments, as well as dealer commission paid to petrol pump owners for their service.
Where Do Current Margins Stand?
Although Indian oil marketing companies do not release information on their gross marketing margins frequently, calculations by brokerages indicate that the per-litre GMM on petrol for oil marketing companies range from Rs 5 per litre to Rs 7.5 per litre.
Diesel margins, however, could be as high as Rs 4 per litre or almost at a breakeven level of Rs 1.4 per litre.
What Is The Impact?
Oil marketing firms operate on a fixed margin per litre sold, also known as gross marketing margin; any decrease in the selling price directly impacts their income.
The reduction in prices results in a Rs 2 per litre decrease in the current petrol gross marketing margins. While the price cut does impact petrol margins, they still remain positive.
However, if diesel margins do currently stand around Rs 1.4 per litre, the Rs 2 price reduction pushes the margins of oil marketing companies into negative territory.
Inventory Losses
The price cut could also lead to potential inventory losses for the oil marketing companies.
Oil marketing companies typically purchase crude oil using a combination of short-term and long-term contracts. With retail prices reduced, any fuel purchased at a higher price before the cut could lead to minor losses on that specific inventory.
Oil Price Risks
Around the same time, the price cut announcements were made, Brent crude oil futures gained and breached the $85 per barrel mark.
Rising crude oil prices—spot Brent crude oil prices have risen 3.9% in the past week—leads to higher higher cost of procurement for OMCs.
Normally, such increases in costs would be reflected in consumer prices. However, with retail prices for petrol and diesel fixed and recently decreased, any escalation in Brent crude prices could further tighten gross marketing margins.
