For PSU refiners, the rise in oil prices to $100 per barrel is problematic

 For PSU refiners, the rise in oil prices to $100 per barrel is problematic

In an election year, oil PSUs may be required to maintain the current diesel and gasoline pricing.

For PSU refiners, a spike in oil prices to $100 per barrel is problematic because they might be required to maintain the same pricing for diesel and gasoline during an election year.

They will then have to deal with the consequences of under-recoveries, which might total thousands of crores.

Industry estimates show that state-owned oil companies are already losing Rs 5 per litre of diesel and only making Rs 1 per litre of gasoline, despite Monday's drop in Brent crude oil prices to $92.42 per barrel from around $98 last week.

In September, the average price of the Indian crude basket was $93.4 per barrel. It consists of crude processed in Indian refineries in a 75:25 ratio of sweet grade (Brent dated) to sour grade (Oman & Dubai average).

Because the crude basket does not account for the discount on Russian crude, it does not reflect the price at which PSU oil marketing firms (OMCs) purchase crude.

Since mid-June, Brent crude has increased by almost 25% due to a number of factors, including production curbs by major oil-producing nations, indications of stronger macroeconomic conditions, and a decrease in inflation in key oil-consuming nations like the US.

Nirmala Sitharaman, the finance minister, criticized the Congress-led UPA for issuing oil bonds in a broad manner back in February.

"We have already made payments of Rs. 2.34 lakh crore for oil bonds, including interest. Including perhaps a minor amount from earlier, the total sum raised under the oil bond during the UPA's tenure was Rs. 1.71 lakh crore. However, we have already paid 2.34 lakh crore, including interest, and still have 1.07 lakh crore to pay. Between 2025 and 2026, the final payment will be made, she stated.

Sitharaman's statement reveals the opposition of the BJP government to oil bonds. So, with crude surging beyond $100 per barrel, how does the Centre expect to compensate the state-owned oil refiners?

The main source of the crude confusion is Russian oil shipments. As of now, Moscow's discounted Russian crude oil continues to benefit the nation. Within the $60 per barrel G-7 price barrier, refiners can purchase Russian crude without risking sanctions.

According to some sources citing data analytics firm Kpler, the contribution of Russia and Iraq in India's September oil imports was roughly 43% and 22%, respectively, whereas in August, Russia's part was 35.4% and Iraq's was 19.5%.

After shifting its supply to the Asian market in response to Western sanctions, Russia has surpassed the United States as India's top oil supplier.

According to CareEdge Ratings, "Indian refiners, which are the main gainers from cheaper Russian crude, should still be able to clock offensive refining margins (GRMs) of around $9–10 per barrel in FY23–24, as the likely decline in their profit margins on processing Brent crude will begin to be offset by the significantly expanded margins on processing Russian petroleum products.

Due to the rise in crude prices, state-owned OMCs reported enormous losses in the first half of 2022–2023 but have since turned a profit.

Although the government may reduce excise taxes to ease the burden during an election year and win favor with voters, it is not yet apparent how the oil marketing companies would be paid.