Crude oil cost pressure on refining, marketers

The recent rise in prices of the Indian basket of crude oil have again put back pressure on the oil refining and marketing companies.

The oil marketing companies, which had returned positive margins on retail sale of petrol and diesel in the second fortnight of January, could again find their numbers being reversed.

The Indian basket of crude was at $56.61 a barrel on February 6. The average price of the basket so far this month is $56.17 a barrel, as against $52.53 in January. Prices had dropped to $49 a barrel on January 18, 2007.

"The rising international prices will increase our under-recoveries on retail sales," said BN Bankapur, director (refineries), India Oil Corporation (IOC).

A senior executive of Hindustan Petroleum, the second largest marketer, echoed IOC's views. "With retail prices being capped, under-recoveries have become a part of our life," the executive added.

Bankapur, however, said that high global crude oil prices would not affect refinery margins, as they are linked on the difference between international diesel prices and crude oil prices, and not just crude oil prices alone.

"The difference between the two is more or less similar to what it was a month ago. Refinery margins are not likely to be affected," he said.

Refining margins are the difference in value between the products produced by a refinery and the value of the inputs used to produce them.

IOC, the largest marketer of petroleum products with 11,935 retail outlets, reported a 25 paisa profit on sale of a litre of diesel and Rs 3.40 for a litre of petrol. Diesel margins were negative in the first fortnight of the month.

"These margins are likely to fall. Diesel margins may slip back into negative territory soon," an IOC official said. Margins on retail sales of petroleum products are revised on a fortnightly basis.

Share prices of the three state-owned oil marketing companies have slumped so far this month. IOC's share price on the Bombay Stock Exchange has dropped 5.06 per cent this month, while Hindustan Petroleum has lost 3.88 per cent. Bharat Petroleum's stock has dipped 2.26 per cent since February 1.

An official in the oil ministry, however, said that oil marketing companies have nothing to complain about as there are many safety nets in place to protect them from high crude oil prices.

"Oil bonds are being given out. We have called for rationalisation of duty structures on products as well," the official said.

Global crude oil prices climbed above $59 a barrel on Wednesday ahead of an expected sharp fall in weekly US distillate stocks after a blast of cold weather boosted heating fuel demand. Analysts expect prices to climb further in the short-term.

Prices have rebounded from a sharp slide at the start of the year, rallying nearly $10 from a 20-month low struck in mid-January as temperatures drop in the US, fear over OPEC supply cuts begins to set in and investors take a renewed interest in the energy complex.