Increase in crude prices will weaken Indian oil companies: Moody’s

Chennai: A Rs 220 billion one time grant to the three oil marketing companies by the Centre would cover their losses on sales of domestic liquefied petroleum gas (LPG) they still incur losses on sale of petrol and diesel, said Moody’s Investors Service on Monday.

Last week, the Central government approved the grant to the Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) to cover losses on sales of domestic LPG between June 2020-June 2022.

According to Moody’s, the refiners’ earnings would remain weak for FY23 despite the grant because of significant losses incurred by these companies on sale of petrol and diesel during the first half, for which they have not received any compensation so far.

“We estimate that state-owned refining and marketing companies have lost around $6.5 billion-$7 billion in revenue on the sale of petrol and diesel from November 2021-August 2022,” Moody’s said.

“We estimate IOCL’s revenue loss on petrol and diesel sales to be $3.0 billion-$3.2 billion, while revenue losses for BPCL and HPCL are estimated to be around $1.6 billion-$1.9 billion,” Moody’s said.

Recovery in demand following easing of movement restrictions and the onset of the Russia-Ukraine war has led to a significant increase in crude oil prices, which averaged around $104 a barrel (bbl) from January-August 2022 compared with around $80/bbl in November 2021.

Despite higher feedstock costs and an increase in international petrol and diesel prices, the selling prices of petrol and diesel in India, which account for almost 55 per cent of total sales of petroleum products in the country, did not increase at the same pace, which resulted in losses for the state-owned refiners, Moody’s said.

According to Moody’s barring a small increase of around Rs 10/litre (around $20/bbl) between March 22- April 6, 2022, net realised prices for refiners have largely remained unchanged since November 2021.

While crude oil and international transportation fuel prices have decreased from the highs seen earlier in the year, they remain subject to the volatile industry environment and geopolitical developments.

Any increase in crude oil or international product prices without a commensurate increase in net realised prices for the Indian refiners will further weaken their earnings and cash flow outlook, Moody’s said.