Why Petrol, Diesel Prices Won't Fall Even As Crude Tumbles

Indian oil retailers may first recoup their accumulated losses before passing on the benefit of falling crude oil prices to consumers.

Brent crude dropped to a nine-month low of $84 a barrel on Monday after averaging above $100 per barrel for most of the months since Russia invaded Ukraine in February. It's trading around $85 on Wednesday. But that won't reflect at the filling station anytime soon.

“Till Sept. 23, in Q2FY23, marketing losses or under recovery on the sale of diesel were Rs 4.10 per litre as compared to Rs 12 per litre in Q1FY23," Sumit Pokharna, vice president at Kotak Securities, told BQ Prime. “The under recoveries on petrol were Rs 2 per litre in Q2FY23 till Sept. 23, compared with a loss of Rs 11 per litre in Q1FY23.”  

Given the high under-recoveries on the sale of auto fuels, analysts told BQ Prime that it would take time for any downward revision in petrol and diesel prices.

"Unless H1FY23 losses are partially recovered, it is unlikely that OMCs will revise fuel prices," said Sabri Hazarika, oil analyst at Emkay Global Financial Services.

The high accumulated marketing margin losses are due to the higher cost of the Indian basket of crude as a result of the ongoing war in Ukraine, including the inability of state-run refiners and oil marketing companies such as Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd, and Indian Oil Corp Ltd., to raise retail fuel prices since April 6. 

Debashish Mishra, partner at Deloitte India, said downward revision in retail prices is also unlikely because of the depreciating currency.

Crude oil prices are expected to bounce back given the supply-side constraints caused by the failure of talks with Iran on the nuclear deal and OPEC plus production being below their daily targets.

“Crude prices have corrected due to the fear of a long recession,” Mishra of Deloitte said, “but the supply market remains extremely tight and one can expect crude to bounce back.”

Efforts to revive the 2015 Iran nuclear deal have stalled as Tehran insisted on the closure of the UN nuclear watchdog's investigations.

“This has eased expectations of a resurgence of Iranian crude oil exports,” ICICI Securities said in a note. “Further downside was prevented after data showed OPEC plus is now producing crude oil below its targets by a record 3.58 million barrels per day, which is about 3.5% of global demand.” 

The depreciation of the rupee has further complicated the situation, as any benefits of lower crude oil prices are offset by higher dollar rates since oil refiners buy crude oil in dollars. Thus, a depreciating rupee makes oil dearer.

The local currency depreciated to an all-time low of 81.66 against the dollar on Monday as the U.S. dollar continued to strengthen. "The dollar index surged almost 2% to a fresh two-decade high last week after the Fed raised interest rates by another 75 basis points as expected and signalled larger increases at its upcoming meetings," ICICI Securities said. 

The near-term prices of petrol and diesel are expected to remain a function of the government's efforts to balance OMCs' financial health with inflationary and fiscal pressures, Fitch Ratings said in a note.

However, it is expected that the marketing segment may turn profitable from FY24 as crude oil prices continue to fall to Fitch's assumption of $80 a barrel. “We expect marketing margins to remain aligned with crude oil prices over the long term.”  

On elevated gross refining margins, analysts said although the spread on diesel and petrol has narrowed from the highs of above $25 per barrel witnessed in Q1FY23, the average GRM would still be higher in the range of $15 per barrel.  

“Spreads for diesel, which forms around 45% of BPCL's product slate, remain well above long-term historical averages and should support GRMs, notwithstanding the recent correction in petrol cracks,” Fitch said in a note. “We expect GRMs to moderate in the rest of FY23, with the full-year average of $14 remaining the highest.”