Any news is good news for crude oil. Talk political tensions and the prices will spike on supply disruptions fears. Sprinkle the market with some positive economic data, the prices will rally. A combination of these two (fear and optimism) have helped crude prices so far.Oil prices have been on an uptrend since early 2011 and are showing no signs of coming down anytime soon.
High oil prices will only worsen the financial situation for oil marketing companies (OMCs). In order to help the OMCs erase some of their losses, the Indian government deregulated petrol prices in June 2010. However the government still compensates the OMCs for selling diesel, kerosene and liquefied petroleum gas at government-fixed prices. In-spite of deregulation, OMCs like Oil India, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL) still have to get the government's approval to raise petrol prices. As a result due to elections the OMCs were unable to raise petrol prices sine the past 3 months. OMCs last raised petrol prices in December 2011. Price of Brent crude has increased by 11.06% since January 1, 2012 which has resulted in significant losses for the OMCs.
According to the oil ministry, OMCs are losing around Rs.4.86 bn a day on account of selling petroleum products at government-mandated prices. The total losses on this account to be borne by refiners this fiscal are expected at Rs.1.32 tn compared with Rs. 781 bn last year. As a result OMCs have written to the government to suspend the so-called deregulation. This is because they are not being reimbursed for the losses suffered on account of selling petrol at what are effectively government-mandated rates. This decision to regulate petrol prices again will benefit OMCs as they could get compensation from government to reduce their losses.
To conclude, between full compensation of under recoveries and deregulation of diesel prices, it is the former which makes perfect business sense for public sector OMCs. After all, they have managed pretty well so far this way. This is evident from the ample cash reserves in their balance sheets and rich dividends they offer every year. With this system, they have smoothly carried out ambitious capex plans as a result of which the country faces refining over capacity (ironically along with a crude supply shortage). Hence, the real gain in freeing prices lies not for public OMCs, but for the Government to improve their fiscal balances.