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Soaring crude prices a credit negative for PSU OMCs: ICRA

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Modern 'Smart' drilling software could boost India's oil outputNew Delhi, March 5 (IANS) The PSU oil marketing companies (OMCs) may go slow in automatic pass through of rise in international crude oil prices to the consumers due to the already high cost of transportation fuel such as petrol and diesel, ratings agency ICRA.

According to the ratings agency, the marketing margins of OMCs have been higher than the past long-term averages, presumably to bolster profits in a scenario of weak demand and subdued GRMs.

“Faced with a global over-supply amid weak demand owing to the Covid-19 pandemic, the crack spreads of MS, diesel and ATF crashed to historic lows leading to subdued GRMs globally,” Prashant Vasisht, Vice-President, Corporate Ratings, ICRA was quoted as saying in a statement.

“Nonetheless, marketing margins may witness pressure in the near term, if they pause fuel price changes as per the pricing formula.”

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Lately, prices of petrol have crossed the psychological Rs 100 per litre mark in some cities leading to increasing public outcry against the high prices and the inflationary impact of the auto fuels.

While some states such as Assam, Tripura have reduced VAT rates, the Centre has not yet reduced the excise duty rates on the auto fuels owing to its tight fiscal position post the Covid pandemic.

Besides auto fuels, the retail prices of domestic LPG have also risen by 43 per cent from Rs 574 per cylinder in March 2020 to Rs 819 per cylinder now providing some succour from under recoveries.

“But with the recovery in the prices of crude oil, the working capital debt of Refining and Marketing companies would remain at elevated levels, though interest costs would remain in check owing to lower interest rates,” the statement said.

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“However, the refining and marketing companies continue to incur high capex for capacity expansions, petrochemical and pipeline projects and expansion of retail network. Accordingly, any adverse impact on the profitability and cash accruals would lead to higher reliance on debt which might strain their credit metrics.”

Crude oil prices have recovered to pre-Covid levels owing to the revival in demand coupled with a
voluntary cut in crude oil production by Saudi Arabia over and above the cut in production by ‘OPEC+’ and colder than expected winters in many parts of the world.

Additionally, vaccination programmes undertaken by several major economies has also propped prices owing to hopes of a fast recovery in economic activity.

Source: IANS

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