Diesel nears market rate, underrecovery dips

Question mark still remains on formal decontrol

The retail price for diesel has almost touched the market rate, with only an eight paise a litre difference with the global benchmark price. Both Regular monthly price increases and softening in international crude oil prices have helped the underrecovery decline.

If the trend continues, this will bring the price at par with international rates in about a week, not necessitating another monthly increase of 50p a litre, due on October 1.

However, whether the government will allow oil marketing companies (OMCs) the pricing freedom, is not clear.

Since January 2013, diesel prices have been raised every month by up to 50p a litre, a cumulative rise of Rs 11.81 a litre in 19 instalments. The petrol price was market-linked in June 2010.

OMCs are from this month incurring a combined daily underrecovery of about Rs 195 crore on the sale of diesel, kerosene sold through ration shops (PDS kerosene) and cooking gas cylinders sold for home use (domestic LPG). This is lower than the Rs 230 crore of daily underrecovery the previous fortnight.

The underrecovery for financial year 2014-15 are projected to be Rs 91,665 crore; it was Rs 139,869 crore in 2013-14. For PDS kerosene and domestic LPG in the first fortnight of this month, these will be Rs 32.67 a litre (Rs 32.98 a litre in the past fortnight) and Rs 427.82 a cylinder (Rs 447.87 the past fortnight), respectively. The daily international crude oil price of the Indian basket was $100.97 a barrel (bbl) on Friday, against $101.07 on Thursday.

ICRA Research, an associate of Moody’s Investors Service, said: “There is lack of clarity whether the government will (now on) authorise OMCs to revise the prices of diesel with market conditions or the retail price increase would be capped at 50p a litre per month even if there is a sudden increase in crude oil prices or depreciation in the rupee demanding a steeper price hike.”

Adding: “The decision on this will be critical for private retailers to restart their fuel stations, as the government might continue to share underrecovery only if OMCs cap the price hike at 50p a litre per month.”

The fall in gross underrecovery should lead to decrease in short-term debt levels and interest cost of OMCs, improving their liquidity.

“Besides, the fall in underrecoveries could also lead to decrease in the subsidy burden of the government as it might retain a large part of the benefits to meet its aggressive fiscal deficit reduction target for FY15,” ICRA Research said.

However, the burden on upstream companies Oil and Natural Gas Corporation and Oil India Ltd continues to be fixed at around $56 a barrel of crude oil production. They might not benefit materially through a fall in underrecoveries in FY15, unless the sharing formula is revised by the year-end. The softened crude oil prices will also impact the net realisation of both if the subsidy burden remains fixed at $56/bbl.

With overall gross underrecoveries declining, those for upstream companies would eventually decrease over the medium term (from FY16 onwards).