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Indian Oil facing increased cost pressure due to crude oil spike

   June 22, 2018        388        Sanjeev Choudhary

Every $10 per barrel rise in the price of crude oil raises working capital cost by about Rs 500 crore per year and cost of fuel consumed internally by $0.9 per barrel for Indian OilCorp, its finance chief has said.

India Oil Corp, the nation’s largest refiner and fuel retailer, is facing increased cost pressure due to crude oil spike. “We are negatively impacted. Our fuel cost increases, working capital cost increases,” said AK Sharma, director (finance) at Indian Oil Corp.

The company uses about 9% of the oil it buys as fuel at its refineries. Higher crude prices also result in the company borrowing more in working capital, which translates into higher interest outgo of Rs 400-500 crore per year for every $10 increase in crude oil price.

Lower crude oil prices until last year had helped refiners sharply cut their borrowings. Indian Oil’s borrowings fell to Rs 32,000 crore at the beginning of 2018 from Rs 86,000 crore in March 2014, mainly after lower crude prices shrank working capital need. But this trend is set to reverse now with prices rising again.

Crude oil has risen 60% in a year to about $75 per barrel, a sharp recovery after going to $28 in January 2016 from $116 in June 2014. Prices of refined products generally follow the crude oil trend globally, and Indian refiners align local prices with international rates. But sometimes during the poll season, state firms, under political pressure, aren’t able to fully pass on the price hikes to retail consumers.

Shares in Indian Oil, valued at about Rs 1.65 lakh crore, have lost about 20% in a year.

Indian Oil has been diversifying its import basket to reduce dependence on any specific region and seek competitive rates. It also set up an office in Singapore last year to procure crude oil. Its Singapore desk has so far purchased about 8 million barrels of oil worth about half a billion dollars, Sharma said.

ET Energy World

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