Monday, November 10, 2014

De-Regulation of Diesel and Its Impact

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.