As Consumers Reel from High Fuel Prices, OMCs Make a Killing Off Inventory Gains

Indian Oil, BPCL and HPCL together made inventory gains of over Rs 12,000 crore in the April-June 2018 quarter alone as the price of crude rallied.

New Delhi: Indian consumers of petrol and diesel may be reeling under high prices but oil marketing companies (OMCs) and the government are having a great time.

The three state-owned companies – Indian Oil, BPCL and HPCL – together made inventory gains of over Rs 12,000 crore in the April-June 2018 quarter alone as the price of crude rallied.

OMCs are entitled to international prices of petrol and diesel. But there is usually a two or three-month time lag between buying and processing of crude by OMCs. If global prices go up during this period, OMCs reap inventory gains. Conversely, if international prices fall, they could suffer inventory losses.

Indian Oil reported inventory gains of Rs 7,866 crore in the April-June quarter of the current fiscal. It had earned inventory gains of Rs Rs 3,442 crore in the preceding quarter.

HPCL’s inventory gains jumped 12 times to Rs 1,905 crore from the previous quarter. BPCL saw its inventory gains rise six-fold to Rs 2,679 crore.

Helped by inventory gains, Indian Oil’s net profit increased by over 30% to Rs 6,831 crore from the preceding quarter. Indian Oil’s financial results beat market estimates for April-June period. Net profit would have been even higher if the company had not suffered forex loss of Rs 1,805 crore.

IOC earned a gross margin of $10.2 on every barrel of crude that it processed during the April-June quarter, higher than $9.1 per barrel that it had reported during the preceding quarter.

The central and state governments too have reaped huge gains from the petroleum sector in recent years. The Centre earned Rs 2.84 lakh crore in taxes from the petroleum sector during 2017-18, more than double what it got in 2014-15. It also mobilised Rs 14,575 crore in dividend from oil PSUs in 2017-18. The figure would have been even bigger if ONGC had not forked out nearly Rs 37,000 crore to buy the Centre’s stake in state-owned refiner HPCL.

The government also wanted a higher dividend payout from ONGC but the latter stated its inability to comply with its demand, citing its depleted cash balance.

ONGC, a largely debt-free company until then, had to borrow more than Rs 20,000 crore from the market to pay for the HPCL stake. The mop-up helped the Modi government narrow its fiscal breach.

The state-owned oil producer also paid Rs 7,700 crore for buying 80% stakes in Gujarat State Petroleum Corporation’s Deen Dayal West block in the K-G basin, in a deal that left analysts puzzled.

The petroleum sector also remains a key source of revenue for state governments who together mopped up Rs 2.09 lakh crore in 2017-18 in the form of taxes and dividend from it.

Fuel prices have reached record highs over the past week, inviting shrill calls for cut in taxes to provide relief to consumers. On Monday, the opposition held nationwide protests against the government’s inaction over rising fuel prices. But the Modi government has so far refused to buckle down under mounting pressure, saying it has no control over the global oil market.

“Why are the people of India indifferent to Bharat Bandh? They understand the rise in fuel prices, though temporary, is because of factors beyond the control of the Indian government and ordinary Indian,” Union law minister Ravi Shankar Prasad said while commenting on opposition’s protests.

The current oil rally is being driven by the approaching deadline of November 4 for re-imposition of US nuclear sanctions on Iran, a key exporter.

About one million barrels a day of Iranian oil has already been sucked out of the market and more supply could be hit when US sanctions take hold.

Bank of America Merrill Lynch analysts have projected that for every one million barrels per day imbalance, there could be an impact of about $17 a barrel on the benchmark Brent crude price.

India’s fuel prices are among the highest in Southeast Asian countries, largely because of excessive taxes imposed by the central and state governments on them (over 40% of the final costs of petrol and diesel), as reported by The Wire last September.

International oil prices started their descent in July 2014. The Narendra Modi government, which assumed office in the last week of May that year, took advantage of the crash in oil prices to boost its revenue and bridge fiscal deficit instead of passing on the benefits to consumers.

The NDA government hiked excise duty on auto fuels by nine times in 2014-15 and 2015-16. Excise duty on petrol and diesel was Rs 9.48 and Rs 3.56 a litre respectively before the NDA government took office. However, through repeated hikes, it has jacked up duty to Rs 21.48 and Rs 17.33 a litre, an increase of 226% and 486% respectively over the May 2014 level.

When global oil market rallied early this year, putting upward pressure on domestic fuel prices, the government cut excise duty on petrol, diesel by Rs 2 a litre and also abolished the additional excise duty of Rs 6 a litre. But it imposed road cess of Rs 8 a litere on petrol, diesel to make up for the revenue loss resulting from the reduction in excise duty.