Oil PSUs struggle with domestic price freeze as global rates soar

India's state-owned oil marketing companies face a formidable challenge as they maintain a freeze on fuel prices for the 18th consecutive month, even as privately owned Shell India boldly raises diesel prices by a staggering Rs 20 per litre in response to skyrocketing international crude oil costs.

The international crude oil market has been roiled by surging prices, with Brent crude recently reaching nearly US $95 per barrel owing to supply constraints. However, Indian public sector fuel retailers, despite incurring substantial losses, have refrained from adjusting domestic fuel prices, leading to a growing disparity between the private and public sectors.

The decision was clear for Shell India, the local subsidiary of one of the world's largest oil and gas giants. With international oil prices hovering around US $90 per barrel, the company initiated a daily price increase of Rs 4 per litre last week. This bold move has resulted in Shell India selling diesel at a premium rate of Rs 130 per litre in Mumbai and Rs 129 per litre in Chennai. Meanwhile, petrol at Shell pumps is priced between Rs 117 and 118 per litre.

In stark contrast, customers flocking to public sector petrol pumps find relief in petrol prices of Rs 106.31 a litre in Mumbai and Rs 102.63 in Chennai. Diesel at government-owned pumps remains equally affordable, priced at Rs 94.27 per litre in Mumbai and Rs 94.24 in Chennai.

Bengaluru, too, witnesses a significant disparity, as Shell India sells diesel at Rs 122 per litre compared to Rs 87.92 per litre at petrol pumps owned by public sector firms and Rs 87.99 per litre at Reliance-BP outlets.

The continuing price freeze imposed by the government on fuel has placed the country's oil PSUs in a precarious position. With each passing day, these companies lose Rs 5 per litre of diesel, as domestic retail prices remain stagnant while international rates surge.

Analysts have observed that oil marketing companies, which enjoyed significant marketing margins in previous quarters, are now seeing the margins slip into negative territory. According to Nomura Research, OMCs (oil marketing companies) recorded under-recoveries of Rs 7.40 per litre on the sale of auto fuels until 24 September.

Blended marketing margins have declined by 80 per cent sequentially, falling below normative levels of Rs 2 per litre in the ongoing quarter. This decline is driven by increasing crude prices and product spreads, while retail prices remain static. Based on current crude and product prices, blended marketing margins stand at a substantial loss of Rs 5.30 per litre for OMCs.

Adding to the complexity of the situation is the impending state elections. With crucial polls scheduled for December, the government faces a dilemma regarding fuel price hikes. Looming political considerations make it unlikely that fuel retail prices will be adjusted before the elections, exacerbating the financial strain on oil PSUs.

Despite these formidable challenges, strong refining margins have offered some respite to public sector OMCs, aided by a favourable demand-supply scenario and unexpected maintenance issues in Europe. Refining margins represent the earnings oil companies accrue by converting crude oil into various petroleum products.

As India grapples with these issues, the question of government intervention in fuel pricing remains at the forefront of public discourse. The ongoing debate holds significant implications for the nation's energy landscape and the financial health of state-owned OMCs.