Mumbai: The rise in crude oil prices in the April-June quarter may affect the profits of Indian oil marketing companies such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd, say analysts. Collectively, these companies are expected to take a hit of around Rs12,000 crore for the quarter ended 30 June—the government insists they sell petroleum products at a discount to ensure that customers are not affected by soaring crude prices. In 2006-07, these companies took a hit of Rs49,387 crore. Bharat Petroleum Corp. Ltd will announce its quarterly results on Friday.
According to a senior executive at a oil marketing company, the losses from selling petroleum products at less than cost price, known as under-recoveries, for the quarter to June were Rs4.70 per litre on petrol, Rs4.05 per litre on diesel, Rs14 a litre on kerosene and Rs175 per cylinder of LPG. These products account for around 50% of the oil companies’ sales. The other 50% comprises products that do not come under the government’s administered price mechanism regime.
“However, the losses are much less than what they would have been given the rise of the rupee against the dollar,” the executive pointed out. While the price of crude oil has increased by 14.5% since February, the rupee has appreciated by 7.25% against the dollar during the same period. The executive did not wish to be identified because his company is in a silent period prior to the announcement of its quarterly result.
Unlike last year, when the Union government, which fixes the prices of petrol, diesel, kerosene and LPG, announced oil bonds worth Rs24,000 crore to help buttress the financials of state-owned oil marketers, no oil bonds have been announced thus far this year.
Oil bonds are interest-bearing IOU receipts issued by the government that the oil firms can include in their balance sheet. They can also sell these bonds in the market at a discount if they fall short of cash to meet their requirements. The finance ministry issues these bonds in tranches.
“Even with the government issuing oil bonds, the oil marketers can barely expect to survive. With inflation under control, the government could consider raising the prices of petrol and diesel to help the oil marketers,” said Shriram Iyer, head of research at a domestic brokerage Edelweiss Securities.
Analysts say that if the current trend of oil prices continues, the under-recoveries in the second quarter could be even higher. The price of Brent crude touched an all-time high of $80 (Rs3,224) a barrel on 13 July and continues to range around $76 a barrel. Brent crude accounts for 42% of India’s crude oil imports; Oman-Dubai crude, which accounts for 58% of imports, sells at $71 a barrel. The average price of oil imported to India was $72.69 per barrel in July so far, against $67.99 in June and $65.89 in May.
The medium term outlook on oil prices continues to point towards higher prices and is reflected in forward market prices. MCX oil futures for August, September and October 2007 are all around $76 a barrel. India imports almost 75% of its crude oil requirements.
The under-recovery on petrol for the first fortnight of July stood at Rs5.90 per litre; on diesel it was Rs4.80, says a report on oil prices issued by Quantum Asset Management Company. In 2006-07, total under-recoveries amounted to Rs49,387 crore (about $12.43/barrel) which meant that the recovery per barrel was $49.93 against an average cost for the year of $62.36, according to the Quantum report.
At current prices and exchange rates, under-recoveries will grow by Rs3,000 crore with consumption growth pegged at 6%.
The government has estimated that the projected under-recoveries for this year will be around Rs55,000 crore if oil prices remain at $70 a barrel level. Under-recoveries increase by Rs2,200 crore for every one dollar increase in crude oil price.
Crude prices are expected to correct in the third quarter once winter rolls in and the driving season gets over, said a Mumbai-based analyst whose company policy does not allow him to be quoted in the media.