Diesel And LPG Prices Could Be Increased – India Ratings & Research

Oil and dollar have been rather volatile in the past few days. Initially the scare of an attack on Syria had prices rising. This was then followed by the weekly report released by the US Energy Information Administration on petroleum supplies that further spiked prices and aggravated the pressure that has been existent since the past few months. This, coupled with the downward pressure on the rupee has been leading to a double hit for India.

Clearly, under-recoveries have increased considerably in the past few months. In India Ratings & Research’s (Ind-Ra) view, diesel and LPG prices could be increased in the coming days to control under-recoveries on petroleum products. This, according to Ind-Ra could lead the government to effect a one-time increase in the prices of diesel and subsidised LPG cylinders.

Daily gross under-recoveries have ballooned in the past few months. In the fortnight effective May 16, 2013, daily gross under-recoveries stood at Rs 2.52 billion. A fortnight ago, this stood at Rs 3.89 billion. And, currently the figure stands at Rs 4.7 billion.

Considering the 60% sharing of under-recoveries by the government in the last two years, Ind-Ra estimates the total subsidy burden for FY14 could well exceed its FY14 budget of Rs 650 billion. The government could thus ask oil marketing companies to increase prices of diesel and LPG prices.

Similarly, the pressure has also been mounting on upstream companies. The burden of under-recoveries and the increasing cost of production have been shrinking the net crude oil realisation. However, Ind-Ra has maintained its rating on upstream companies because of the strategic importance of the sector and the strong likelihood of government support.