Govt likely to cut petrol, diesel prices ahead of Diwali
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New Delhi: The Central government is expected to cut petrol and diesel prices by Rs 3-5 per litre ahead of Diwali and key state elections in November-December, according to JM Financial Institutional Securities’s report.
The recent report came a week after the government cut the prices of domestic 14.2 kg LPG cylinders by Rs 200 per cylinder for all 330 million consumers providing relief from the recent surge in inflation.
As per the report, Oil Marketing Companies (OMC) marketing segment earnings could come under risk if crude price sustains above $85 per barrel or OMCs are forced to cut petrol and diesel prices in the next few months.
The burden of this LPG price cut will be borne by the government; however, this may increase OMCs’ working capital given the usual lag in government compensation.
The price cut should mostly happen via the reduction in excise duty and/or VAT given OMCs are losing on the auto-fuel marketing business at the current high crude price, the report said.
However, we cannot rule out a scenario whereby the government may nudge OMCs to cut petrol/diesel prices as their balance sheets have largely been repaired due to likely strong profits in the first half of FY24, the report added.
A sharp rise in Brent crude price to $90 per barrel, driven by OPEC+ supply cuts, and a surge in diesel cracks has led to OMCs’ blended spot auto-fuel gross marketing margin (GMM) declining to negative Rs 0.1 per litre vs. +Rs 8.8 per litre in Q1 of FY24 and vs. historical GMM of + Rs 3.5 per litre.
“Our calculation suggests OMC's break-even Brent price (to earn historical GMM) is significantly lower at nearly $80 per barrel. Weak marketing margin is being partly offset by a jump in GRM aided by strong diesel cracks; however, a rise in Chinese oil product export quota and narrowing of Russian crude discount is likely to cap GRMs,” the report said.
OMCs’ 2QFY24E EBITDA is likely to decline to Rs 345 billion vs. Rs 483 billion in 1QFY24 but it is still higher vs. normalised quarterly EBITDA of INR 160 billion; HPCL will see the sharpest decline given its leverage to the marketing business, it added.
With inputs from IANS