Moody’s Ratings said retail prices of diesel and petrol will have to be raised at some point. Vikas Halan said, "It has to be a combination of all three parties involved -- the government, the OMCs, and the consumer." High crude costs and a weak rupee are hurting oil companies.
State-run oil marketing companies (OMCs) cannot continue to absorb high crude oil prices while freezing retail prices of diesel and petrol for long durations, particularly at a time when Brent is constantly hitting $100 per barrel coupled with record freight and insurance premiums.
For Indian refiners, said Moody's ratings, the EBITDA growth, or operational profitability, will only come when they are able to pass on some of the increase in prices.
Vikas Halan, Managing Director Corporate Finance Group at Moody's Ratings, told businessline, "I think from a pure math perspective, just adding the numbers here, when you look at the problem, it's a problem of who bears the losses. Who puts the bill here, and it has to be a combination of all three parties involved -- the government, the OMCs, and the consumer. It can't be one alone."
Brent crude prices have been trading near or above the psychological $100 per barrel mark for almost a month, compounding problems for India, which imports more than 85 per cent of its crude oil requirement. Record high freight rates and war risk premiums is further adding to the problem.
The scenario becomes more serious considering inflation is rising pushed up by higher energy prices and at a time the rupee is trading at around ₹96 against the US dollar pushing the current account deficit further north.
"So now, it's again not just who bears the bill, but who bears the bill when. This is getting into policy, and I don't want to get into all of that. That is something for the government to decide. But it is pretty clear if this situation continues, there has to be a point where you make the decision: either you recapitalize OMCs, so that they can continue to bear these losses, or you allow them to increase (retail) prices," Halan explained.
Maulik Patel, Head of Research at Equirus Securities, said on September 11, "If crude remains above $100 per barrel, with restricted retail-price increases, OMCs could face negative petrol and diesel marketing margins, higher LPG under-recoveries, higher crude-landing, freight and insurance costs, working-capital and debt accumulation and inventory losses if crude subsequently corrects sharply."
Crude price
Moody's Ratings expects that the 2026 baseline crude oil price will be in the range of $90-110 per barrel, which is based on the assumption that the West Asia conflict is resolved by late 2026 and supply is restored over time. It also expects the medium term price range of $55-75 pre barrel.
Another factor is that sustained crude prices of $100-120 a barrel could adversely impact demand, which will eventually weaken growth and oil consumption.
"From where we are today, there is a natural point beyond $120 that oil demand starts to shrink. So, there is some degree of self-correction that will be there, and because of that, you will see a gradual easing of demand. Once the demand goes, for example, the longer oil prices stay high, the more people will start to use alternatives. If they start investing in, for example, EVs, once they have switched, it's very difficult to get them back," Halan pointed out.