OMCs fear rise in underrecoveries

As crude oil prices touched a fresh one-year high, trading at above $75 a barrel on Thursday, analysts and oil sector executives said underrecoveries could rise and become a cause of concern.

Crude oil has been on a steady climb this week. The Indian crude oil basket has so far averaged at $69.08 per barrel against an average of $67.70 per barrel in September. For the fortnight beginning October 16, the oil marketing companies say while they will be losing 73 paise per litre on sale of petrol, loss on per litre sale of diesel will be nil. Though the underrecoveries have decreased from Rs 1.90 per litre in petrol and Re 1 in diesel during the previous fortnight, they are bound to rise with the current spike. “Underrecovery will be a cause of concern for the oil marketing companies (OMCs) if the rupee depreciates along with crude oil prices increasing. Also, cracks are improving and an optimism in the economic recovery might bring a recovery in demand. This could increase the underrecoveries further,” said Vinay Nair, research analyst, Khandwala Securities.

The rupee that has been appreciating so far has brought some relief to the companies since they have to shell out less for a dollar purchase. Rupee has seen a 4 per cent rise this year, against a 7 per cent depreciation last year. On Wednesday, rupee closed at 46.14 to a dollar after touching 46.08 — a 12-month high.

“A plunge in the dollar has made investors pump money into crude and other commodities which have driven the prices up. This could go up if there is a good winter season ahead pushing the underrecoveries up,” said an analyst with a Mumbai-based broking firm.

At present, the state-run OMCs — IndianOil Corp (IOC), Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) — are losing about Rs 104 crore per day on selling auto and cooking fuel below cost.

The total underrecovery on sale of petrol and diesel per day is between Rs 4 crore and Rs 5 crore, says an IOC official.

“If the crude oil prices go up further, under-recoveries will increase. At present, however, it is not too much a cause of concern,” said an executive from one of the OMCs.

On September 15, the government issued bonds worth over Rs 10,306 crore to the three state-run OMCs to compensate them for the losses incurred on account of selling petroleum products below market price. These bonds were issued for the last financial year. While bonds worth Rs 6,207.06 were issued to IndianOil, Rs 2,033.99 crore worth bonds were given to HPCL and Rs 2,065.28 crore to BPCL.

In July 2009, for the first time this year, the government had increased the price of petrol by Rs 4 a litre and diesel by Rs 2 a litre. The prices were increased following a rise in the international price of crude oil and the increasing under-recovery of the state-run OMCs on domestic fuel sales at a control price.