The eagerly awaited decision to
de-regulate diesel prices announced on 18th October 2014, brings a
hope for a fair and a competitive market with a level playing field for all
marketing companies.
According to Moody’s, an
International Credit Rating agency, Diesel de-regulation is “credit positive”
for India as “this will allow the market to adjust to global commodity price
trends and reduce the exposure of government finances to those trends”.
The International oil prices
have been on a steady and steep decline in the past few weeks. This falling
trend warrants a decrease in selling price of Diesel in the domestic market.
Thus, a steep downward revision in selling price of Diesel as provided in the
below table.
RSP (Rs. per Litre)
|
Mumbai
|
New Delhi
|
Kolkata
|
Chennai
|
Price before de-regulation
|
67.26
|
58.97
|
63.81
|
62.92
|
Revised Price (Oct 19, 2014)
|
63.54
|
55.60
|
60.30
|
59.27
|
Further Reduction (Nov 1, 2014)
|
61.04
|
53.35
|
57.95
|
56.84
|
While
these cuts are good for denting inflation further, we should be cautious that pump
prices do not fall too low as this shall provide us a cushion in case global
prices rise later this year, and also prevent diesel consumption from soaring
once again.
For Government, OMCs and Upstream Oil
Companies - From now, the OMCs are selling diesel at market-linked prices which
would remove the under-recoveries on the sale of the fuel and would also lower their
working capital and short-term debt requirements.This will further reduce the subsidy burden for the government, although
fiscal savings are likely to be limited. Upstream oil companies will
also be benefitted as they share the government's subsidy burden.
For private Players–Private Players would stand to
gain Public Sector OMCs market share in the medium to long term. Currently the
three Public Sector OMCs accounts for around 98% share of fuel retailing market
in India, of this Diesel accounts for aOil Companiesround 55% of overall sales.
Earlier, the private players
were forced to shut down their retail outlets or slow their pace of
expansion as they were unable to compete with the OMCs who were getting
government support for their losses. Reliance held a 12% market share in 2005,
but this has slipped to less than 0.5% now (with ~300 Operational ROs).Essar
Oil, the private player with the largest number of retail outlets currently
operating - 1,400 expects a gradual pick up in diesel sales from its outlets,
which only sell petrol at the moment. Shell India, has around 75 of
its 82 large-format outlets functioning in six states.
A foray by private oil refiners
into the domestic oil marketing space could, according to an October 22, 2014
report by India Ratings, a credit
rating and research firm, "gradually lead to greater competitive intensity
and also result in these private refiners eating into the market share of
existing national oil companies over the long run, as also impacting revenue
and profit margins."
The government should also start
raising kerosene and LPG prices gradually in the coming months so that
subsidies on these fuels are also steadily reduced.India’s annual subsidies on
these two common man’s cooking fuels will be INR.65,000-80,000 Crore this year,
depending on how global oil prices move.
However, it remains to be seen
what the government will do in case of substantial increase in International crude
prices, whether it will succumb to the pressure or will it stick to the current
plan. The movement of prices in
international oil market and INR-USD exchange rate shall continue to be closely
monitored and developing trends of the market will be reflected in future price
changes in Diesel prices.
By
InfralineEnergy Oil&Gas Knowledgebase Team
Disclaimer
The views expressed
here are solely those of the author in his private capacity and do not in any
way represent the views of the Infraline
Technologies (India) Pvt. Ltd. (organization). The organization is not liable for any use that may be made of the
information contained therein and any direct/indirect consequences resulting
therefrom.
