As crude oil prices take a dip, retail fuel prices fail to follow suit

As crude oil prices take a dip, retail prices of petrol and diesel in Indian cities have failed to follow suit in equal measure. While some attribute it to the complex formula used in the country to arrive at fuel prices, others see it as a perfect opportunity for oil-marketing companies (OMCs) to make up for discounts offered a month back. 

Brent crude prices on Monday closed at $59.2 per barrel, a 13-month low. Retail petrol price in New Delhi was Rs 74.49 a litre and diesel was Rs 69.29 a litre. 

The retail prices are benchmarked to the C&F price of petrol and diesel, which is the cost inclusive of freight if the fuel has to be imported. Added to this, are marketing margins of OMCs and dealer commissions, as well as central and state taxes. 

Though a fall in crude oil price might not have an exact correlation with product prices, crude oil prices have declined by 30 per cent since October 9. In the same period, petrol prices dipped 9 per cent and diesel fell 7 per cent.

“The difference can be attributed to the 15-day rolling average (for crude prices), which is taken into account in the formula for arriving at retail prices for petrol and diesel,” said an analyst with a domestic brokerage firm. 

Calls made on Monday to directors in charge of marketing at Indian Oil, Bharat Petroleum, and Hindustan Petroleum remained unanswered. 

Not everyone is convinced that the anomaly is attributable to the formula for arriving at retail prices. 

“One may say it is because of the 15-day average. However, there could be more to it. OMCs right now are in a tight spot, where refining margins are under pressure and marketing margins were almost wiped off because of the Rs 1 per litre discount announced in October. OMCs may be using this window of low crude prices to make up for the loss,” said a second oil and gas analyst. 

On October 4, after a government directive, OMCs decided to absorb a Rs 1 per litre discount on retail petrol and diesel prices in a bid to cut the massive rise in prices. 

Analysts are not clear on what turn retail petrol and diesel prices will take in the coming weeks. “Whether retail prices in India will show the same decline in the coming weeks will depend on whether Brent crude prices continue to fall,” said the first analyst quoted above.

However, some believe even a few weeks would be enough for OMCs to make good the money they lost because of the Rs 1 discount.

“Assuming OMCs can save up 5 paise per day, they will be able to recover most of the loss in less than a month,” said the second analyst.

This is not the first time India’s retail fuel prices have shown anomaly with the changes seen in Brent prices.

For instance, as recent as September this year, diesel prices were up 24 per cent year on year, petrol was up 15 per cent, while Brent crude was down by 41 per cent in the same period. Crude prices were on a rise starting September this year, which is now showing signs of correction.