InvestorQ : If the government has raised bulk diesel rates, why is it hurting the oil marketing companies (OMCs) in India?
Riya Dwivedi made post

If the government has raised bulk diesel rates, why is it hurting the oil marketing companies (OMCs) in India?

shrinidhi Rajan answered.
12 months ago

The general expectation was that once the results of the assembly elections were declared, the OMCs would go in for generous price hikes. However, there has not been a single price hike either in petrol or in diesel despite crude rallying by over 75% in the last 3 months. Clearly, OMCs are losing money on every litre sold. But a new dimension was added by the government hiking the prices of bulk diesel by Rs.25 per litre. Retail prices remain same.

Bulk diesel is that market which orders directly from the oil companies. Transport fleets, car fleets, bus services, malls, industries etc directly procure diesel from the companies as they are bale to service the bulk needs better. However, the recent decision to hike the prices of bulk diesel by Rs.25, while keeping retail prices constant has created a piquant situation. It has created an arbitrage for bulk buyers, who now prefer the retail outlets.

Normally, the price at the bulk fuel centres and the retail pumps are almost the same to avoid arbitrage between prices. Now that there is a gap of Rs.25 per litre between bulk and retail prices. For instance, in Mumbai, diesel costs around Rs.94 per litre at retail outlets but bulk diesel is costing Rs.122-Rs.123 per litre. This is forcing most of the bulk buyers to crowd to retail outlets, as a result of which retail diesel offtake has gone up by 30% in Feb-22.

That is where the problem is arising. Oil marketing companies like BPCL, HPCL and IOCL have not raised prices of petrol and diesel for the last four and half months. First it was elections and secondly, government did not want a petrol price hike amidst soaring inflation. Now, the net result is that effectively, the OMCs are losing a lot of money on every litre they sell. Since they are selling a lot more diesel, they are losing more for every litre sold.

Who has been the worse hit. In fact, all suppliers. OMCs are hit by the arbitrage. Private players like Nayara Energy with 6,510 pumps across India and Jio with 1,500 pumps are struggling to stay afloat as they would lose all their business if they hike rates of petrol and diesel. OMCs still dominate oil distribution and retailing with 90% share or approximately 81,700 pumps in India. Now, PSU OMCs have to adjust these losses against inventory gains and higher GRMs during the happier times last one year.