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Soaring crude prices a credit negative for PSU OMCs: ICRA

Besides auto fuels, the retail prices of domestic LPG have also risen by ~43% from ~Rs. 574/cylinder in March 2020 to Rs 819/cylinder now providing some succour from under recoveries.

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Crude oil prices have rocketed upwards post OPEC+ decision to keep production steady besides which the voluntary cut of 1 million barrel per day by Saudi Arabia which has been extended till April 2021. Lower supply has led to the price of crude oil recovering to pre-Covid levels owing to the revival in demand coupled with a voluntary cut in crude oil production by Saudi Arabia over and above the cut in production by OPEC+; and colder than expected winters in many parts of the world. The prices were also buoyed by freezing weather in the US which shut about 1 mbd of production. Additionally, vaccination programs undertaken by several major economies has also propped prices owing to hopes of a fast recovery in economic activity as an increasing proportion of population is vaccinated.

According to Mr. Prashant Vasisht, Vice-President, Corporate Ratings, ICRA, “Increasing crude oil prices have meant sharp increase in retail prices of petrol and diesel in the domestic market. Prices of petrol have crossed the psychological Rs. 100/litre   mark in some cities leading to increasing public outcry against the high prices and the inflationary impact of the auto fuels. While some states such as Assam, Tripura have reduced VAT rates, the GoI has not yet reduced the excise duty rates on the auto fuels owing to its tight fiscal position post the Covid pandemic. Given the rising burden on public, the PSU OMCs may go slow in automatic pass through of rise in international fuel prices to the consumers. The marketing margins of oil marketing companies have been higher than the past long-term averages, presumably to bolster profits in a scenario of weak demand and subdued GRMs. Faced with a global over-supply amid weak demand owing to the Covid-19 pandemic, the crack spreads of MS, diesel and ATF crashed to historic lows leading to subdued GRMs globally. Nonetheless, marketing margins may witness pressure in the near term, if they pause fuel price changes as per the pricing formula.” 

Besides auto fuels, the retail prices of domestic LPG have also risen by ~43% from ~Rs. 574/cylinder in March 2020 to Rs 819/cylinder now providing some succour from under recoveries. But with the recovery in the prices of crude oil, the working capital debt of Refining and Marketing companies would remain at elevated levels, though interest costs would remain in check owing to lower interest rates. However, the refining and marketing companies continue to incur high capex for capacity expansions, petrochemical and pipeline projects and expansion of retail network. Accordingly, any adverse impact on the profitability and cash accruals would lead to higher reliance on debt which might strain their credit metrics.


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crude oil prices