OMCs breathe a sigh of relief as crude oil price declines

Oil marketing companies (OMCs), hit by a surging crude oil price and inability to raise prices of diesel, kerosene and liquefied petroleum gas (LPG), are breathing a sigh of relief, as the northward rally in crude has stopped.

The Indian basket of crude is at a three-week low of $106.68 per barrel. The high under-recoveries on these products are expected to come down in the next fortnight.

“The decline is a welcome relief. While our losses on sales will continue, working capital requirement will come down, as the outgo on crude purchase will be lower,” said G C Daga, director (marketing), IndianOil, the country’s biggest OMC.

OMCs, however, pointed out that the decline was small and concerns remained on losses. B Mukherjee, director (finance), Hindustan Petroleum, said under-recoveries were high and there was serious concern.

The Indian basket of crude oil has so far averaged around $110.36 per barrel in March, nine per cent more than the February average of $101.16. The current financial year average price is $83.88 per barrel, 20 per cent more than the 2008-09 average of $69.76.

However, prices have been on a declining trend for some days in tune with global crude prices that have seen marginal softening, following the earthquake in Japan.

State-owned companies sell diesel, domestic LPG and kerosene at government-controlled prices and, therefore, incur under-recovery or revenue loss on sale of these products. Petrol was decontrolled from June 25, 2010. A company’s loss is compensated by the government from time to time.

Now, OMCs — IndianOil, Hindustan Petroleum and Bharat Petroleum — incur a loss of Rs 15.79 on every litre of diesel, Rs 24.74 on every litre of kerosene and Rs 297.80 per cylinder. On petrol, companies continue to incur a loss of Rs 4.50 per litre, as they have not been able to pass on the rise.

The combined gross loss on the three products (excluding petrol) for this financial year is estimated at Rs 78,000 crore. The government compensates these losses through cash and discounts from upstream oil companies.