Despite the rise in crude oil prices, Moody's predicts that gasoline and diesel prices won't increase

 Despite the rise in crude oil prices, Moody's predicts that gasoline and diesel prices won't increase

According to a report by PTI on October 8, Moody's Investors Service said that despite growing raw material costs, a rise in gasoline and diesel prices is unlikely given that general elections would take place the next year.

The three state-owned Indian Oil Marketing Companies (OMCs) -- India Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation -- would see decreased profitability as a result of rising crude oil prices, according to an analysis by Moody's. Because of the upcoming elections in May 2024, these corporations' ability to increase retail selling prices of gasoline and diesel is projected to be limited.

Present situation

About 90% of the market is controlled by the three largest state-owned fuel retailers, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), who have kept gasoline and diesel prices frozen for a record-breaking 18 straight months. This protracted freeze remained despite last year's spike in the price of the raw material, crude oil, resulting in significant losses in the first part of the fiscal year 2022–2023. But a later drop in oil prices helped them return to a profit.

The margins of the three retailers have once again turned negative as a result of the increase in global oil prices since August. When compared to the high levels seen in the quarter ending June 30, 2023 (1Q fiscal 2024), the Oil Marketing Companies' (OMCs) marketing margins, which measure the gap between their net realized prices and international prices, have substantially eroded. Due to the rise in global prices, the marketing margins for diesel went negative in August, while those for gasoline significantly shrunk over the same month. Given the continued high levels of oil prices, the operational performance of the OMCs is expected to decline in the next 12 months after a strong showing in the April-June quarter.

The financial assistance provided by the Indian government to the oil marketing industry in the amount of 30,000 crore, which was first announced in the budget earlier this year, is anticipated to improve cash flows for the OMCs and partly meet their capital expenditure needs. In response, IOCL and BPCL have already informed the government that they have rights concerns. The timing and quantity of such revenues are still undetermined, hence Moody's has not taken this into account in its predictions.

driving forces behind pricing increases

According to Moody's, the sharp rise in raw material costs is a direct result of the sharp increase in crude oil prices, which in September rose by roughly 17% to over $90 per barrel. After averaging $78 per barrel in Q1FY24, this increase occurred.

Moody's attributed this rise in oil prices to the Organization of the Petroleum Exporting Countries' (OPEC) extension of production cuts of roughly 1 million barrels per day until December 2023, along with Russia's extension of export cuts of roughly 300,000 barrels per day over the same time period.

However, it noted that given the slowing of global development, there is little chance of sustaining high oil prices.

The agency said, "The increase in gross refining margins (GRMs) has somewhat offset the decline in the OMCs' marketing margins. Benchmark Singapore GRMs have increased since June, mainly as a result of the region's continued increase in the use of liquid fuels and scheduled refinery outages that have restricted the supply of petroleum products.

In the next quarters, the ratings agency expects GRMs and the price of transportation fuels to moderate. This assumption is based on worries that the downturn in China's economy would impair demand, as well as an increase in supply when refineries start up again following routine maintenance.

It said, "Even though a smaller gap between international versus domestic prices will decrease sales losses for the OMCs, their general profitability is projected to remain weak, as retail selling prices are likely to stay constant."

Company missteps

In spite of crude oil prices remaining between USD 85 and USD 90 per barrel in the second half of fiscal 2024 (April 2023 to March 2024), Moody's forecasts that the three firms' fiscal year profitability would be strong and exceed previous levels. This is attributable to the Oil Marketing Companies' (OMCs) very high profitability in the first quarter of the fiscal year 2024, when their EBITDA alone was almost equal to their yearly EBITDA average from the previous several years. However, Moody's cautions that the OMCs would start experiencing EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around USD 100.

The strong marketing margins for gasoline and diesel contributed to the stable operational performance in the first quarter of fiscal 2024. The OMCs' net realized pricing for the sale of diesel and gasoline have mainly stayed steady since April 2022, despite falling feedstock costs. Brent crude's price decreased from USD 112 per barrel in the same period of fiscal 2023 to USD 78 per barrel in the first quarter of fiscal 2024.

According to the rating agency, IOCL and BPCL, two of the three Oil Marketing Companies (OMCs), are better prepared than HPCL to withstand any future increases in crude oil prices. The agency also said that the differences in the business characteristics of the OMCs account for the variety in their capacity to absorb rising feedstock prices.

Due to their bigger operations and extensive integration between their marketing and refining businesses, IOCL and BPCL are more resistant to unfavorable changes in the operating environment. The engagement of IOCL in pipelines and petrochemicals further exemplifies the company's commercial diversification. In contrast, HPCL is more vulnerable to unfavorable pricing swings due to its smaller size and more dependence on its marketing activities.

According to the rating agency, "Despite high capital spending and shareholder payments continuing, as well as rising crude oil prices leading to increased needed working capital in the period, strong earnings within the first quarter of fiscal 2024 and lower crude oil prices when compared to fiscal 2023 have decreased the OMCs' working capital needs and enabled them to decrease their borrowing over the past few months. Therefore, we predict that until fiscal 2024, all three firms' leverage, as indicated by debt/EBITDA, will stay favorable relative to the rating standards.