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OMCs use crude price drops to make up for fall in demand

Experts say OMCs are making up for inventory losses and reductions in refining margins.

Written by Karunjit Singh | New Delhi | Updated: April 22, 2020 1:40:49 am
crude oil, crude oil price, wto crude oil price negative, crude oil price india, india crude oil, crude oil price today, crude oil india price, crude oil news, crude oil falling, crude oil covid 19 A pumpjack operates on an oil well in the Permian Basin near Orla, Texas. (Bloomberg Photo)

Petrol and diesel prices have remained unchanged for over a month at Rs 69.59 per litre and Rs 62.29 per litre, respectively, in the Capital, even as Indian crude basket has fallen from around $33.36 per barrel on average in March to $24 per barrel on April 20.

Experts say oil marketing companies (OMCs) are making up for inventory losses and reductions in refining margins due to a drop off in demand by as much as 70 per cent due to the lockdown and are unlikely to lower prices in response to the fall in crude prices until demand for fuel recovers.

The price of WTI, the benchmark for prices in North America, fell below zero on Monday closing at -$37.63. India’s basket of crude is not directly affected by the fall as the Indian basket comprises Sour grade (Oman and Dubai average) and Sweet grade (Brent dated) crude oil in a 76:24 ratio.

Read | US oil hits freak negative, but Indian fuel prices may not fall

“OMCs are unlikely to cut prices until demand recovers,” said Abhijeet Bora, senior analyst at Sharekhan by BNP Paribas, noting OMCs such as Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation would use lower prices to make up for inventory losses and lower gross refining margins.

Explained: What explains crude oil prices falling below the $0 mark

Sunilkumar Katke, head of commodities at Axis Securities, said the retail price of petrol in Delhi would be lower by around Rs 12 per litre at around Rs 57, even after increase in taxes and levies by the government if OMCs had maintained the same level of margins in the price of petrol as they were in January before the beginning of a price war between Russia and OPEC pushed up supply and the lockdowns due to the coronavirus outbreak crashed demand.

Katke said despite increased margins, OMCs would not be able to make up for the impact of the fall in demand. “It will compensate for the loss to an extent but not enough given that demand has gone far down. Most of the oil making companies will report poor numbers,” said Katke, adding OMCs will be able to benefit from improved margins only after demand picked up to normal levels.

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