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Explained: OMCs hike fuel prices after 65 days; why more hikes are likely

Petrol and diesel prices: Oil marketing companies hiked the price of petrol by 15 paise per litre and that of diesel by 18 paise per litre on Tuesday in the first hike in auto fuel pieces since February 27.

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: May 6, 2021 9:14:42 am
At a gas station in Pune. (Express Photo: Pavan Khengre, File)

Oil marketing companies hiked the price of petrol by 15 paise per litre and that of diesel by 18 paise per litre on Tuesday in the first hike in auto fuel pieces since February 27. The price of petrol is Rs 90.55 per litre and that of diesel is 80.91 in the national capital. The Indian Express examines why OMCs are hiking prices again.

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Why are fuel prices rising now?

State-owned OMCs had halted upward price revisions at the end of February as record high petrol and diesel prices were becoming an electoral issue in states set to go to the polls. Experts noted that OMCs even absorbed negative marketing margins on petrol and diesel sales during some parts of the freeze in price hikes.

“Margins for OMCs have been depressed and during some periods including when crude oil prices touched $70 per barrel, they were making no margins,” said Vivekanand Subbaraman analyst at Ambit Capital.

Petrol and diesel prices are currently at near record highs due to a combination of the increase in the price of crude oil and elevated taxes on petrol and diesel. The price of petrol has been hiked by Rs 6.8 per litre and that of diesel has been hiked by Rs 7 per litre since the beginning of the year.

The central government had in 2020 raised taxes on petrol by Rs 13 per litre and on diesel by Rs 16 per litre in a bid to boost revenues as economic activity fell sharply due to the Covid-19 pandemic.

Will fuel prices rise further?

Analysts noted that OMCs could hike the price of diesel by Rs 2-3 per litre and that of petrol by Rs 4-5 per litre around current crude oil price levels to both restore their marketing margins to normal levels and recoup lost revenue during the price freeze. Brent crude was trading at around $67.5 on Tuesday.

“OMCs were relying on inventory gains to boost their bottom line but as crude oil prices are not expected to rise much further, they will have to boost marketing margins to maintain profitability as even refining margins are currently weak,” said an analyst who did not wish to be quoted.

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Inventory gains are gains in the value of crude oil as well as petroleum products held by an oil marketing company. OMCs would have registered significant refining inventory gains or gains from an appreciation in the price of crude oil held by the company in the last quarter of FY21 as the price of Brent crude rose from about $52 per barrel at the beginning of the year to about $63.5 at the end of March.

The analyst quoted above noted that OMCs would have to raise prices to boost marketing margins as refining margins were low due to the slow offtake of petroleum products because of Covid-19 restrictions.

An internal note by a leading OMC reviewed by the Indian Express said that crude oil prices were expected to rise further as crude oil demand was set to rise in the US and Europe in the summer and that this would further put an upward pressure on the price of petrol and diesel.

“The positive demand outlook from U.S., Europe, China etc. is expected to outweigh the concerns of slowdown in India with rising Covid-19 cases. These may exert upward pressure on prices during the coming months,” the note said

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