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Recession fears pushed crude oil prices to their lowest in eight months this week. But there is no reason to cheer just yet as the benefit may not reach consumers soon or to the full extent. Let's decode why Oil marketing companies (OMC) have not cut prices!
Huge losses
The weakness in Rupee means import bills would continue to be high for refiners. Moreover, OMCs have incurred huge losses on petrol and diesel retail sales this year and may take more time to recover the past losses, thus there is no scope to cut the fuel price.
OMCs
At the current crude prices petrol sale has turned profitable but OMCs are still making losses on diesel. The accumulated losses for the current fiscal alone remain high and it is unlikely that fuel prices will be reduced significantly even in the next two quarters, a senior official with a state-run OMC told .
Crude fell 8-month low
In a media interaction this month, Minister of Petroleum and Natural Gas Hardeep Singh Puri has said a few times that the OMCs need more time to recover their losses despite falling crude prices. Benchmark Brent fell below $85 a barrel on September 26 for the first time since January. US West Texas Intermediate (WTI) crude also dropped below $80 a barrel.
Factors affecting Oil prices
The experts point out that any decision on fuel price may be impacted by three factors.
1. Recouping Losses
State-run OMCs, IOCL, HPCL, and BPCL reported a staggering combined loss of 218,480 crore in the first quarter of 2022-23. OMCs kept retail petrol and diesel prices unchanged for almost 137 days despite soaring crude oil prices. OMCs resumed increasing the price of petrol and diesel only from March 22 but that too did not cover the losses they were making. Oil industry is volatile; I won't be able to comment when the oil marketing companies make up their losses. In another word, the prices are not going to change in the next few months," said the official.
2. Rupee Weakness
While crude oil prices have softened, Rupee has hit a record low of almost 82 per Dollar. This does not augur well for India and particularly the oil refiners who will bear the brunt of expensive import of crude oil. While the Reserve Bank of India (RBI) today hiked the policy rates by 50 basis points to tackle inflation, the weakness in Rupee would be a key factor affecting fuel prices.
3. Rebound in Crude
The softening in crude oil prices may not last and there is a strong case for it to bounce back and reverse the trend soon, experts believe. JPMorgan expects Brent crude to take a U-turn and head back toward $100 a barrel in the October-December quarter as supply tightens. Central banks (across the world) aggressively hiking policy rates and sanctions on Russia may hurt crude.
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