Price of bulk diesel increased by Rs.25 per litre

For all those who were celebrating that fuel prices have not gone up despite the 80% rally in Brent crude in the last 3 months, there is an interesting piece of news. Amidst the din of rising crude prices, the government has quietly raised the prices of bulk diesel by Rs.25 per litre.

This has resulted in a huge gap between bulk diesel prices and the prices of diesel in retail petrol pumps, but we will come back this point later.

Normally, the price at the bulk fuel centres and the retail pumps are almost the same to avoid any arbitrage between the prices.

Now that there is a gap of almost Rs.25 per litre between bulk and retail prices, the prices of direct sales have gone up while the prices at the retail pump are still the same.

Check - Brent Crude scales to above $130/bbl

As a result, the bulk buyers like transport, travel and industrial companies are buying from the retail outlets due to the price arbitrage.

This creates a very unique problem for the oil marketing companies like BPCL, HPCL and IOCL. Most of the OMCs have not raised prices of petrol and diesel due to the ongoing elections in key states. Despite the elections getting over, the government has been wary of raising prices.

Effectively, the OMCs are losing money on every litre they sell, and now they are selling a lot more. In fact, the more they sell, the more money they lose.

The results are there for all to see. Petrol pump sales have jumped by 20% in February and March because bulk users like bus fleet operators and malls queued up at petrol bunks. For them, this worked out cheaper than the usual practice of ordering from oil companies directly.

That has led to widening of losses for the oil marketing companies (OMCs). It is a normal arbitrage and the bulk users are just making the best of it.
 

However, it is not just the PSU OMC that are being hit. Even the private sector operators of retail fuel outlets are badly hit. Nayara Energy operates nearly 6,510 pumps across India and now for them closure of pumps looks like a more viable solution.

The prices of petrol and diesel have been on freeze for 136 days now. It may be recollected that back in 2008, Reliance had opted to shut down all its 1,432 petrol pumps due to price disparity.

One has to only look at the huge price differential to understand this price arbitrage. For instance, post the bulk price hike, the diesel is being sold to bulk users at a price of Rs.122.05 per litre in Mumbai, while OMC pumps are selling at Rs.94.14 per litre price.

The gap is just too enticing for users so they prefer the retail route over the bulk route. Private players would have lost customers if they had hiked prices.

The oil marketing business is still largely PSU dominated. The 3 PSU OMCs viz. IOCL, BPCL and HPCL control 81,699 petrol pumps in India or nearly 90% of the total all-India capacity. Others like Nayara, Jio-BP and Shell account for the balance 10%.

Even in 2008, the PSU retailers were paid government subsidy while private players were kept out of the scheme. This time around, PSU OMCs have been asked to adjust these losses against their inventory gains and higher GRMs amidst rising prices. It hardly looks like happy days for OMCs.