Refinery Margins To Offset Oil Companies' Losses On Holding Fuel Prices: Fitch

State-owned fuel retailers Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) may suffer marketing losses in January-March 2022 quarter for holding petrol and diesel prices despite a rise in cost, Fitch Ratings said on Tuesday.

However it added that robust core refining margins and windfall inventory gains should mitigate the potential losses in near term.

The three fuel retailers kept petrol and diesel prices unchanged for a record 137-days between November 2021 and March 2022 despite a nearly $27 per barrel rise in crude oil prices. The three companies raised the rates by Rs 10 per litre over 16 days beginning March 22 before again hitting a pause button.

"Gasoline (petrol) and gasoil (diesel) retail prices in India, and consequently the marketing margins of the oil-marketing companies (OMCs), should remain aligned with the movement in crude oil prices over the long term, notwithstanding sporadic periods of constant retail prices amidst heightened volatility in oil prices," Fitch said in a note.

The correlation of retail fuel prices with the 15-day rolling average of crude oil prices (reference prices) has remained high at 93 per cent since the onset of the COVID-19 pandemic in January 2020.

The correlation excludes the impact on retail prices from changes in excise duties, and includes periods when the OMCs did not pass through the movement in oil prices immediately to consumers, it said.

"The OMCs benefitted from strong marketing margins during times of low oil prices (March-June 2020), and endured margin pressure during high oil prices (November 2021-March 2022) as they tried to keep fuel prices affordable," it said.

However, November 2021-March 2022 was the longest retail price freeze despite the reference crude oil prices increasing by nearly $27 per barrel (or Rs 13 per litre) during the period.

This "may lead to marketing losses for the OMCs in the fourth quarter of the financial year ending March 2022", it said adding that retail fuel prices have subsequently been raised by only around Rs 10, implying that further price hikes may be required for marketing margins to reach pre-November levels, and early 2022-23 marketing margins may also be under pressure.

"We believe that robust core refining margins and windfall inventory gains should mitigate potential marketing losses in the near term, and the OMCs may see opportunities to recoup some of the losses in periods of falling oil prices, if and when that happens," it said.

Fitch said it expects such instances of indirect state interference in fuel prices to be temporary, and their impact on the standalone credit profiles (SCPs) of the three OMCs to be neutral over the long term.

"However, if crude oil prices are sustained beyond Fitch's base-case assumptions, then record-high retail fuel prices may limit the extent to which the changes are passed on, pressuring OMCs' credit metrics," it said without giving the reference price.

Fitch believes that freedom on retail fuel pricing continues to remain a key area, requiring clarity before the government's proposed divestment of BPCL can be concluded.