I n 2010, the government decontrolled petrol pricing. Four years later, it deregulated prices of diesel, too. But do public sector oil marketing companies (OMCs) truly have the freedom to set market-linked prices of these fuels?
That’s a worry investors in these stocks — Indian Oil, HPCL and BPCL — will have to contend with as many big States go to the polls this year before the general elections are held next year.
Consider this. In November 2017, with just a month to go for the Gujarat Assembly elections, oil prices had breached $60 a barrel and were on their way up. The global prices of petrol and diesel, on the basis of which the OMCs set fuel rates in India, were also going north.
Going slow
From about $69 a barrel at the end of October 2017, the C&F (cost and freight) price of petrol in the international market shot up to about $74 a barrel by November-end. With the exchange rate fairly steady at about ₹65 a dollar, the price of petrol should also have shot up. Instead, petrol price in Delhi, (in Indian Oil’s daily price build-up calculations) hovered around ₹69 a litre despite the ‘dynamic’ daily pricing mechanism in force since mid-June.
Consumers were happy, but Indian Oil took a hit on its marketing margin, which fell from the end-October figure of ₹3 for a litre of petrolto just about ₹1 by November-end.
This state of affairs continued until mid-December 2017, when the Gujarat elections concluded and after which, Indian Oil put its foot back on the price pedal. By end-December, the petrol price in Delhi rose to about ₹70 a litre and the company’s marketing margin on the fuel neared ₹2.
Making it up
Post election, Indian Oil began playing catch-up — regularly increasing fuel prices in line with the global prices of petrol and diesel, and in, some cases, even when international prices fell. As per data from Indian Oil, the C&F price of petrol in the international market fell from above $74 a barrel in December-end 2017 to under $73 a barrel at the end of February 2018, while the rupee weakened about 30 paise against the dollar.
But the price of petrol rose by more than ₹1.5 to ₹71.5 a litre by February end, with the company’s marketing margin rising to about ₹3.4 a litre. With higher global prices and a weaker rupee, the price of petrol went up further — to ₹73.5 a litre as of March end — and the marketing margin was close to ₹3.5 a litre.
According to a recent report by Antique Stock Broking, “After a near rout, when retail marketing margin slid to just ₹1 per litre from mid-November to mid-December 2017 (during the Gujarat elections due to limited price revisions), marketing margins have now restored to a rather healthy level of ₹3.5 per litre.”
To sum up, during the election season, public sector OMCs went slow on raising fuel prices, sacrificing their margins. And then, when the poll season was behind them, the oil firms made up lost ground by hiking prices, sometimes faster than the global prices of these fuels.
In the next few months, several key State elections are lined up: Karnataka goes to the polls on May 12, while Rajasthan, Madhya Pradesh and Chhattisgarh vote towards the end of the year. The Lok Sabha elections could be held around April 2019.
Will the government’s political considerations again play a part in the pricing decisions of the OMCs?
The market seems to think so. From late October 2017, these stocks have steadily declined, losing 15-30 per cent, with the weakness intensifying in recent times.
On the positive side, with global oil now close to $70 a barrel, prices may not rise too much hereon. For the OMCs, that could obviate the need to hike prices to maintain margins, and shield them from the political bind.