Fuel Rates up 8% Since Daily Price Regime, Says ICRA

Fuel Rates up 8% Since Daily Price Regime, Says ICRA

Petrol and diesel prices have jumped 8% since daily price revision was implemented in mid-June, credit rating agency ICRA said on Tuesday, warning that a sustained price hike can hit demand growth and create inflationary pressures.

The rise in fuel rates can be attributed to a 14% increase in international petrol and diesel prices besides a rise in the commission paid to petrol pump dealers, the agency said in a report.

Retail selling price of petrol in Delhi showed a 7.9% increase from Rs.65.23 a litre as on June 17 to Rs.70.41.

Besides a rise in international oil prices, the increase was also due to a 40% rise in dealers’ commission to Rs.3.57 a litre from Rs. 2.55 earlier and a moderate increase in marketing margins, it said.

“Sustained rise in fuel prices, in the absence of moderation in taxes (excise duty and VAT), could, however, impact the growth in demand, besides leading to inflationary pressures in the economy,” ICRA said.

The government had allowed the oil marketing companies to follow dynamic pricing of auto fuels across the country from June 16, 2017.

With the earlier practice of fortnightly revisions, the price changes were at times sharp, but would now be gradual, leading to lesser resistance from the public and lower risk of political intervention, it said.

ICRA’s K Ravichandran said, “As dealers and some consumers were able to predict price movements, they had been resorting to bulk purchase or drawdown from the inventory towards the end of the fortnight, depending on the direction of prices, resulting in some lumpiness in sales and opportunity loss on the marketing margins for oil companies.”

With greater autonomy and lower political intervention, oil firms could over time expand marketing margins, albeit increasing competition from private retailers would eventually moderate that.

“Moreover, any intervention by the government, which limits the freedom of oil marketing companies [OMCs] in price revisions, in light of rising fuel prices could be a credit negative,” he said.

ICRA said Indian refiners would get a short-term margin lift due to disruptions in the United States caused by severe hurricanes.

Hurricane Harvey led to the closure of a fifth of the U.S.’ refining capacity or about 3.2 million barrels a day in August end, dropping the capacity utilisation sharply to a seven-year low of 79.7 per cent. Along with refining, many crude oil and petroleum product pipelines were also affected by the hurricane.