Indian Oil Firms Won't Cut Retail Fuel Prices In Next 2-3 Months, Says JPMorgan

India's state-run oil marketing companies are unlikely to cut retail fuel prices in the next two to three months as they will first recover large losses incurred on diesel retail sales in the last fiscal, according to JPMorgan.

The government wants the oil companies to cut pump prices after crude and diesel prices dropped from last year's peak following the Ukraine war. According to a JPMorgan report, the oil firms are realising a gross margin of Rs 10–12 per litre on both diesel and petrol, which is sharply higher than long-term averages.

If the crude price stays below $80 a barrel and diesel stays at the current level, then higher marketing margins would be normalised by a combination of fuel price cuts and an excise duty hike, JPMorgan said. It would effectively mean a stimulus to the consumers and will simultaneously be disinflationary too, the report said.

However, the research firm does not see any immediate retail price cuts as the oil firms incurred large losses on diesel retail sales in the nine months ended December, with average gross margins at a negative Rs 15.3 per litre in April-June and July-September of 2023, and these losses were not compensated by the government.

"We expect the OMCs to recoup some of the losses before the retail pricing mechanism reverts back to the daily price change system and believe this is still two-to-three months away at least," the report said.

The debt of oil refiners and retailers had increased significantly on account of sharply higher crude prices and losses in the marketing segment in FY23. With oil coming off the high and margins now back in positive territory, JPMorgan expects the companies to reduce their debt over FY24 even as their capital expenditure remains elevated.

Indian Oil Corp.'s  debt in FY23 was 53% higher than the pre-Covid year of FY19, while that of HPCL rose 137% and BPCL's surged 235% during the period.

JPMorgan sees a positive earnings environment for the Indian refiners, including Reliance Industries Ltd., and expects headline gross refining margins to move higher in the coming months as diesel cracks firm up after the summer months.

Headline Singapore GRMs have been weak over the past few weeks, falling to $3.4 a barrel from $7.6 and $9 in the fourth and third quarters of FY23, respectively.

There were concerns whether the Indian refiners, especially RIL, could witness a sharp fall in earnings in the first half of FY24. "We do not see this happening for two reasons mainly—Singapore GRMs are priced off-Dubai crude and do not reflect the discount on ‘arbitrage barrels’ that the Indian refiners are currently using in their slate, and there was an export tax on diesel, ATF, which had effectively capped diesel cracks at around $20/barrel," JPMorgan said.