Moody's predicts no fuel price hike amid rising crude oil costs as elections loom

File Photo/PTI

Moody's Investors Service has forecasted that petrol and diesel prices in India are unlikely to see an increase despite the surge in raw material costs. This decision is attributed to the upcoming general elections scheduled for next year.

Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), three state-owned fuel retailers controlling roughly 90 percent of the market, have maintained petrol and diesel prices at a standstill for an unprecedented 18 consecutive months. This freeze has persisted even as the cost of crude oil increased significantly last year, resulting in substantial losses in the first half of the 2022-23 fiscal year before a decline in oil prices restored profitability.

International oil prices have strengthened since August, putting pressure on the margins of the three state-owned oil marketing companies in India. Moody's reported, "High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India -- IOC, BPCL, and HPCL."

"The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024," Moody's added.

Also read: Punjab CM Bhagwant Mann challenges opposition to "live debate on all issues"

The marketing margins of these oil marketing companies (OMCs) have already significantly weakened since the high levels seen in the quarter ending June 30, 2023 (1Q fiscal 2024). Diesel marketing margins turned negative in August, and petrol margins have also narrowed considerably over the same period as international prices have risen.

While crude oil prices surged by approximately 17 percent to over USD 90 per barrel in September, compared to an average of USD 78 per barrel in 1Q fiscal 2024, Moody's noted that sustained high oil prices are unlikely due to weakening global growth.

Moody's highlighted that despite the decline in OMCs' marketing margins, an increase in gross refining margins (GRMs) has partially offset the impact. Singapore GRMs, the benchmark, have improved since June, mainly due to continued growth in liquid fuels consumption in the region and planned refinery outages, which constrained the supply of petroleum products.

Moody's expects GRMs and international prices of transportation fuels to moderate in the coming quarters as concerns over China's economic slowdown dampen demand while supply increases as refineries resume operations after scheduled maintenance activities.

Despite these challenges, the OMCs' fiscal 2024 earnings are anticipated to remain strong and higher than historical levels, even if crude oil prices remain at current levels of USD 85 to USD 90 per barrel in the second half of fiscal 2024. Moody's stated that the OMCs will begin incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around USD 100 per barrel.

Strong marketing margins for petrol and diesel were responsible for robust operating performance in 1Q fiscal 2024. The OMCs' net realized prices on the sale of diesel and petrol have largely remained unchanged since April 2022, despite declining feedstock costs. The price of Brent crude fell to USD 78 per barrel in 1Q fiscal 2024, down from USD 112 in 1Q fiscal 2023.

Moody's also assessed that among the three OMCs, IOCL and BPCL are better positioned to withstand further increases in crude oil prices compared to HPCL. The rating agency attributed this difference in their capacity to absorb rising feedstock costs to their varying business profiles. IOCL and BPCL have larger-scale operations with a high degree of integration between refining and marketing segments, allowing them to navigate adverse changes in the operating environment better.

On the other hand, HPCL's smaller scale and greater reliance on marketing operations make it more susceptible to unfavorable price movements.

Moody's noted that despite capital spending and shareholder payments remaining high, and rising crude oil prices leading to increased working capital requirements, the three companies are expected to maintain leverage, as measured by debt/EBITDA, well within rating thresholds through fiscal 2024.

Additionally, the Indian government's announcement of Rs 30,000 crore in capital support for the oil marketing sector in this year's budget will bolster cash flows for the OMCs and partially cover their capital spending requirements. IOCL and BPCL have already announced rights issues to the government in this regard. However, Moody's did not factor this into its projections as the timing and amount of such proceeds remain uncertain. (With inputs from PTI)