IOC, also the country’s largest refiner said that demand recovery has been faster than anticipated, and its capacity utilization, which had shrunk to around 35% at the beginning of the coronavirus lockdown is expected to run at full capacity by June end.
The Indian economy is attempting a gradual return to normal after the lockdown. India’s power and overall energy demand, which had nosedived, is also slowly returning to its pre-lockdown levels. Consumption of energy—especially electricity and refinery products—is typically linked to overall demand in an economy.
This comes in the backdrop of the state-owned oil marketing companies (OMCs) increasing fuel prices daily, after pausing for nearly three months during the world’s most stringent lockdown. While petrol price hike was paused on Wednesday after increasing for 17 straight days, diesel price was again raised for the record 18th straight day by 48 paise per litre, making it more costlier than petrol in the national capital.
While diesel costs ₹79.88 per litre in Delhi, petrol is priced at ₹79.76 a litre.
Explaining the rationale behind the spike in petrol and diesel prices, IOC chairman Sanjiv Singh said that with the international demand picking up, parallely the crude oil prices are also going up.
Retail prices of petrol and diesel in India track global prices of auto fuels, not crude, though they are broadly linked to the latter's price trends.
Singh added that it is quite likely that the prices may still go up and it was a difficult question to answer, given that the prices depend on a variety of reasons such as crude oil prices.
The international benchmark, Brent crude, traded at $42.09 per barrel on Wednesday and the US West Texas Intermediate (WTI) was at $39.76 per barrel at the time of going to press. Brent crude had hit a 21-year low and the US oil futures slumped to negative for the first time in April as the glut overwhelmed the world’s limited storage facilities, triggering massive selling by traders.
With the world slowly reopening businesses, oil prices have been up after April’s downward spiral, when demand almost vanished. The cost of the Indian basket of crude, which comprises Oman, Dubai and Brent crude, averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively. It was $19.90 in April and $30.60 in May, according to data from the Petroleum Planning and Analysis Cell. The price was $43.41 a barrel on 23 June.
Singh said that while IOC held the price increase during the lockdown the states contributed to the price increase.
As the world’ largest lockdown bills pile up, state governments across India's political spectrum took difficult decisions to shore up revenues, ranging from increasing value-added tax (VAT) on transportation fuel to introducing liquor cess. However, the union government also raised the excise duty on petrol and diesel to mobilise revenue collections.
Singh said that when the the margins were running negative, following the standards was not workable.
“That's the reason why a call was taken to hold the prices," he said and added, “Negative margins was something that we had never seen, so we had to hold the prices at certain level."
India’s three state-owned OMCs—Indian Oil Corp Ltd (IOCL), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL)—had also refrained from raising prices during the national and state assembly elections.
IOC’ capacity utilization has also picked up and is currently around 83% as India’s economic engines whirred back to life with the easing of lockdown restrictions.
Addressing a press conference on Wednesday Singh said that with public transportation not being in operations, the increased usage of private vehicles has contributed to the quick recovery in petrol demand.
With the world’s second most populous country cooped indoors, the demand for transportation fuel such as diesel and ATF has been subdued.
“Some consumption patterns will still corrected with time, as life gets normalised," Singh said and added, “Now onwards, the recovery will be driven by other sectors."
Green shoots have sprouted in the Indian economy over the past few weeks, since the country began easing restrictions after a lengthy coronavirus lockdown, Prime Minister Narendra Modi recently said.
Mint reported on 5 June that traffic congestion, power generation, port activity, vehicle registration and other high-frequency data point to the economy perking up as India reopens, recovering from a devastating slump as factories went idle and people were ordered to stay at home amid the pandemic.
Singh added that by the year-end; India’s energy demand should be very close to the pre-Covid levels.
In a related development, IOC on Wednesday also announced a net profit of only ₹1,313 crore for the last financial year (2019-20), a 92% dip as compared to ₹16,894 crore profit registered in 2018-19. This was primarily on account of the state run firm registering an inventory loss of ₹12,531 crore in the last fiscal as compared to an inventory gain of ₹3,227 crore in 2018-19.
IOC also posted lower refining margins. The gross refining margin— the difference between the cost of processing crude and the revenue earned from the sale of finished products—was $ 0.08 per barrel in 2019-20, against $ 5.41 per barrel in 2018-19.
The refiner reported an annual revenue of ₹5,66,950 crore for the financial year 19-20 as compared to ₹6,05,932 crores in 208-19.
“Loss for the fourth quarter of FY 19-20 is ₹5,185 crores as compared to profit of ₹6,099 crores in the corresponding quarter of FY 18-19. The variation is majorly on account of inventory losses and lower refining margins during current quarter," the company said in a statement.
The inventory loss for the fourth quarter ended March was alone to the tune of ₹14,692 crore.
Singh said that he was hopeful that India’s energy demand will grow rapidly and IOC is continuing with the approved capital expenditure of ₹26,143 crore in 2020-21.