Mumbai: State-run oil marketing companies (OMCs) Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) have stopped absorbing the government-mandated cut of 1 per litre on sales of petrol and diesel following an over 36% fall in global crude oil prices in the last three months, said two senior OMC officials, requesting anonymity.

This means that Indian Oil, BPCL and HPCL will not be passing on all the benefits of the drop in crude oil prices to consumers at the petrol pump.

On 4 October, the centre had directed the OMCs to absorb a petrol and diesel price cut of 1 a litre, which according to estimates, would have led to a collective hit of 9,000 crore on margins over two quarters.

“We are no longer absorbing the mandated price cut. There is no need when crude oil prices have cooled off," said one of the officials mentioned above.

Retail prices of petrol and diesel in India are linked to their prices in global markets and not that of crude. That results in the demand-supply situation of finished products in global markets having some effect on domestic retail prices of auto fuel.

Despite that, crude oil, which accounts for about 90% of the cost of these refinery products, is the biggest determinant of the retail price of fuel.

On 4 October 2018, crude prices were at $83.58 a barrel. It was hovering at $53.32 a barrel on 2 January.

The falling oil prices has also negated price intervention risks with auto fuel marketing margins now at unprecedented highs, leaving them 5% above normal on average for the third quarter of FY19, analysts of Jefferies India Pvt. Ltd explained in a note on 17 December.

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“There is no direct co-relation between crude oil price and fuel retail price. Retail prices do not move in tandem with crude oil price. In October, crude oil dropped from $83 a barrel to $75.09 a barrel. OMCs have to contain volatility. So we only take a gradual price increase or decrease," said the second official mentioned above.

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To set prices of petrol and diesel, domestic oil companies consider trade parity pricing, which is based on the prevailing prices of these products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. Other elements, such as dealer commission, excise duty and value added tax, are added to the trade parity price.

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In June 2017, the OMCs switched from a fortnightly pricing system to daily price revision as the government sought to initiate more reforms with regard to pricing in the sector when prices remained subdued.

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“When we lose marketing margin on fuel sales, we account for that. When crude slides, it gives us an opportunity to recover the losses made while selling fuel below the market price," said the first official.

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