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Fuel Rates Up 8% Since Daily Price Revision In Mid-June, Says ICRA

Petrol and diesel prices have jumped 8 percent since daily price revision was implemented in mid-June, ICRA said on Tuesday warning that a sustained price hike can hit demand growth and create inflationary pressures.

The rise in fuel rates can be attributed to a 14 percent increase in international petrol and diesel prices beside rise in commission paid to petrol pump dealers, the ratings agency said in a report.

Retail selling price of petrol in Delhi showed a 7.9 percent increase from Rs 65.23 per litre as on June 17 to Rs 70.41.

Besides the rise in international oil prices, the increase was also due to a 40 percent rise in dealer’s commission to Rs 3.57 per litre from Rs 2.55 earlier and moderate increase in marketing margins, it said.

ICRA ReportSustained rise in fuel prices, in absence of moderation in taxes (excise duty and VAT), could however impact the growth in demand, besides leading to inflationary pressures in the economy.

Also Read: Government Won’t Step In To Check Rising Fuel Prices, Oil Minister Says

The government had allowed oil marketing companies to follow dynamic pricing of auto fuels across the country from June 16, 2017.

“As dealers and some consumers were able to predict price movements, they had been resorting to bulk purchase or draw down from the inventory towards the end of the fortnight, depending on the direction of prices, resulting in some lumpiness in sales and opportunity loss on the marketing margins for oil companies,” ICRA's K Ravichandran said.

“With greater autonomy and lower political intervention, oil firms could over time expand marketing margins, albeit increasing competition from private retailers would eventually moderate that,” he added.

K Ravichandran, Senior Vice-President, ICRAMoreover, any intervention by the Government, which limits the freedom of oil marketing companies (OMCs) in price revisions, in light of rising fuel prices could be a credit negative.

ICRA said Indian refiners will get a short term margin lift due to disruptions in U.S. caused by severe hurricanes.

Hurricane Harvey led to closure of a fifth of the U.S. refining capacity or about 3.2 million barrels per day in August end, dropping capacity utilisation sharply to seven year low of 79.7 percent.

Along with refining, many crude oil and petroleum product pipelines were also affected by the hurricane.

“Due to sudden spike in crack spreads (difference between crude oil price and product rates) globally due to this disruption which is yet to be fully normalised, the domestic refiners will gain in the form of higher gross refining margins (GRMs) in the near term, leading to improved profitability,” it said.

Over the medium to longer term, GRMs of domestic refiners are, however, expected to weaken due to additions to global refinery capacity at 4.4 million barrels per day over 2017- 2020, exceeding the demand growth at 3.3 million barrels a day.

Icra said delays in commissioning of some of the proposed projects and closure of unviable refinery capacities could partly support GRM levels over the medium term.

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