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Explained: Lower fuel prices may not last beyond elections, hurt BPCL valuation

Petrol and diesel prices in India: A correction in crude oil prices to about $62 per barrel in early April has allowed OMCs to cut the price of petrol and diesel by about 75 paise per litre.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: April 22, 2021 9:21:40 am
Experts noted that customers may have to pay more later as OMCs may be slower to pass on the benefit of any fall in crude oil prices to customers to make up for lower margins during election periods.

Oil Marketing Companies (OMCs) cut the prices of petrol and diesel by 14-16 paise per litre across major cities on Thursday after a 15-day halt in price revisions as the states of West Bengal, Tamil Nadu, Kerala and Assam went to the polls.

We examine the impact of price halts during elections and how consumers may end up paying higher prices for petrol and diesel after elections are over.

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Why are there lower fuel prices during elections?

Even though OMCs are notionally free to set the prices of petrol and diesel as both the products have been deregulated, OMCs often cut the price of petrol and diesel or hold them constant around elections as fuel prices often become a political issue. In the latest round of halts, the OMCs have revised the price of petrol and diesel only four times in a 47-day period which has witnessed significant volatility in the price of crude oil, the key input cost for autofuels.

Experts noted that in early March, OMCs faced negative marketing margins on petrol and diesel as the price of Brent crude rose to $70 per barrel but OMCs kept prices constant.

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A correction in crude oil prices to about $62 per barrel in early April has allowed OMCs to cut the price of petrol and diesel by about 75 paise per litre. Brent crude prices have risen again to about $66.8 per barrel as on Thursday. The impact of crude oil prices on domestic fuel prices are felt with a lag as refiners benchmark petrol and diesel prices to a rolling 15-day average of international prices of the products.

A report by ICICI securities notes that lower margins in the first three months of this year have pushed overall marketing margins for OMCs down to about Rs 1.2 per litre in the quarter ending March compared to about Rs 3.2 per litre in Q4 FY20.

How will fuel prices change post elections?

Experts noted that OMCs are likely to increase the price of petrol and diesel to restore their marketing margins to normative levels. Experts noted that customers may have to pay more later as OMCs may be slower to pass on the benefit of any fall in crude oil prices to customers to make up for lower margins during election periods.

How do halts impact OMCs?

Experts noted that investors had come to expect such moves during elections and subsequent reversions to normative margins post the election period. The share price of Indian Oil Corporation Ltd. (IOCL) has fallen by about 8 per cent since the beginning of February 27 when OMCs initially stopped revising prices, while the share price of Bharat Petroleum Corporation Ltd. (BPCL) has fallen by 10 per cent and that of Hindustan Petroleum Corporation Ltd. (HPCL) has fallen by 1.4 per cent.

Analysts noted that such practices could impact long term valuations of OMCs, notably in the case of BPCL which is set to be privatised.

“Why would anyone give a high valuation (for BPCL) when the government can cut your marketing margins every time it is politically expedient to do so,” said an analyst adding that even after the privatisation of BPCL, it would have to match prices with the remaining state-owned refiners – IOCL and HPCL if they cut prices during elections.

The analyst who did not wish to be quoted said that OMCs may take the view that inventory gains from the rising price of crude oil can help boost earnings despite lower marketing margins but noted that investors evaluate refiners on their marketing margins and not on factors outside the company’s control such as global crude prices.

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