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Why state-owned refiners can’t go wrong with daily fuel prices

Why state-owned refiners can’t go wrong with daily fuel prices

If a dynamic model of pricing comes into effect, then it is not just the customer who will benefit, but public oil companies, which control over 95 percent of the market, will emerge winners, too.

For some time now, public sector oil companies have wanted to get the government out of their hair. And for good reason. Constant interference and requests (read: subsidies) from big brother have bled them. But those days could soon be behind them. In what could be an act of defiance, but also a show of independence, public sector oil companies are contemplating reviewing the prices of petrol and diesel daily. If a dynamic model of pricing comes into effect, then it is not just the customer who will benefit, but public oil companies, which control over 95 percent of the market, will emerge winners, too.

Oil marketing companies have to encounter two main risks – one is of oil price fluctuations and two is of currency fluctuations. They generally create a hedging position to take care of both these risks. The hedges are taken from the moment crude oil is booked till the time it will be sold. It generally takes over a month for the crude oil that a refiner books to go through the distillation columns and yield petrol and diesel. It then takes more time (say, another month) for it to travel from the refineries to the vending stations spread across the country.

By changing prices on a daily basis the oil companies will be able to reduce the price risk arising out of fluctuations in crude as they can now realign the prices the moment the fuel leaves the refinery gates. The hedging, which is usually between 5-7 percent will now be triggered in a month’s time, and not two.

They need not have to wait for the entire leg of the distribution and sales portion. Hedging cost is likely to come down on account of this move as the time for which price risk exists will have come down. The quarterly spikes of inventory and forex gains or losses will flatten, too.

As government is considering a merger of oil companies to create one giant company, daily pricing would be a lot easier to manage. Oil companies have reacted positively to the news of daily fuel price changes, by spiking up 3 percent.

Currently, fuel prices are set every two weeks – a fortnightly practice which is hardly in observance anywhere else in the developed world. It makes business sense for refiners in India to adopt a daily pricing with technology these days making it possible for them to quickly mirror international crude prices. Call it core-pricing, if you will, digital advances have given companies the power to control prices centrally. What will make it easier for the public sector oil companies to implement the price across their dealership is the fact that nearly 95 percent of the vending stations are owned by them.

By changing prices on a daily basis the impact will be minimal and hardly felt by the consumer. Recently, the oil companies announced a sharp decline in the price of petrol by Rs 3.77 per litre and by Rs 2.91 per litre in diesel. Although the news was cheered by the consumer, imagine if it had been the other way around.

Apart from softening the blow on the consumer and saving the government blushes, the move is expected to be beneficial for the company’s financials. Inventory gains and losses will not be as spikey as earlier.

To be fair, ever since petrol prices were decontrolled in 2010 and diesel in 2014, state-owned refiners have had a freer hand than before. But if this move comes to pass, then they will be on their own – at last.

Source: moneycontrol

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