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Energy

Published on: June 28, 2020, 10:44 p.m.
Fuelling a record
  • Petrol prices may see a faster recovery

By Yeshi Seli. Assistant Editor, Business India

Those intending to buy a diesel-engine car primarily because diesel is a cheaper fuel than petrol, will have to rethink, at least in Delhi. In Delhi, the price of diesel per litre (Rs79.88) was higher than petrol (Rs79.76) last fortnight.

With the latest increase, the cost of petrol has risen by a cumulative of Rs9.41 per litre in Delhi and diesel by Rs9.58 per litre in 18 days (7 to 24 June). This is after the oil marketing companies had frozen the prices for nearly 83 days during the nationwide lockdown.
Earlier the difference between the cost of diesel and petrol was between Rs10 and Rs12, where diesel was always cheaper than petrol.

One of the main factors that has led to the hike in price is the surge in value-added tax (VAT) by the state government in May. The VAT on diesel was increased from 16.75 per cent to 30 per cent and on petrol from 27 per cent to 30 per cent. Besides VAT, there is also a component of transportation costs and dealer margins and marketing.

“Whatever price increase we are witnessing is because of international prices,” says Sanjiv Singh, chairman, Indian Oil Corporation Limited (IOCL).

At present over 66 per cent of the cost component of diesel in Delhi is due to Central and excise taxes. In April 2014, when the BJP-led NDA came to power, the cost of diesel was Rs55.49 per litre in Delhi and it is close to Rs80 now. India’s annual diesel consumption is 84 million tonnes approximately.
 
Falling sales

During the lockdown, the sale of petrol went down by 46 per cent and diesel by 54 per cent across India. However, there was an increase in demand for LPG by 21 per cent as people began to cook more at home.

Before the administered pricing mechanism (APM) was dismantled in 2002, the price of diesel and petrol was controlled by the state. However, following the dismantling the state-owned oil marketing companies were permitted to fix the price based on the fluctuating cost of crude in the international market.

Meanwhile, IOCL, reported its first quarterly loss in more than four years due to an increase in inventory losses due to a drastic reduction in the cost of crude prices. Inventory losses are booked when oil prices fall by the time a company processes oil into fuel. Brent crude fell 65.6 per cent during March quarter.

“Between January and March, we registered inventory losses of Rs146.92 billion, against a gain of Rs26.55 billion in 2019,” says S.K. Gupta, head of finance, IOCL. The company reported a fourth-quarter net loss of Rs51.85 billion compared with a profit of Rs60.99 in 2019.

IOCL’s March quarter gross refining margin (the difference between the cost of processed crude oil and selling of the refined product) was -$9.64 per barrel against +$4.09 per barrel in 2019.

Due to the nationwide lockdown, India’s fuel demand dipped towards March-end. Sales are picking up, but full-scale recovery to pre-Covid-19 days won’t happen before the end of 2020.

IOCL’s revenue operations fell to Rs5,66,950 crore in FY20 from Rs6,05,932 crore in FY19. IOCL (along with its subsidiaries), controls about a third of India’s five million-barrels-per-day refining capacity, is at present operating its refineries at about 90 per cent capacity and is optimistic that by the end of July this will be scaled up to 100 per cent.

Meanwhile, experts are of the view that diesel (which is 40 per cent of the overall fuel consumption) will touch pre-Covid levels by 2022-23. For petrol there may be a faster recovery considering that people will now prefer to use their personal vehicles to commute. The demand for petrol will reach pre-Covid levels by 2021-22.

As far as aviation turbine fuel (ATF) is concerned the demand dipped drastically and it will recover at the slowest pace as domestic operations have resumed but international operations will begin only in July.

Crude prices, too, have been volatile due to a sharp decline in demand. The prices of Brent crude oil fell considerably from 2019 average of $64.30 per barrel of oil to $18.54 per barrel in April 2020. The prices have recovered in May 2020 to $28.67 per barrel owing to demand recovery.

However, analysts predict that for most of 2021 the oil prices would average in the range of $45 to $55 per barrel.

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