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Indian Oil Gains After Being Allowed to Raise Diesel Prices

17 Jan 2013

Indian Oil Corp. (IOCL), the nation’s biggest refiner, was headed for its highest close in more than a year after the government allowed it to raise diesel prices.

Indian Oil climbed as much as 8.5 percent to 322.20 rupees and traded 7 percent higher as of 2:17 p.m. in Mumbai, heading for its highest close since October 2011. Smaller rival Bharat Petroleum Corp. gained 6.7 percent to a record 407.90 rupees, while Hindustan Petroleum Corp., the third-biggest state refiner, rose 9.7 percent to 357.75 rupees. The benchmarkSensitive Index (SENSEX) advanced 0.6 percent.

Oil companies have been authorized to raise diesel prices in small amounts over a period of time,” Oil Secretary G.C. Chaturvedi, the senior-most bureaucrat in the ministry, told reporters in New Delhi today. “It’s still not a deregulated product.”

Finance Minister Palaniappan Chidambaram is seeking to reduce spending on fuel subsidies as part of a plan to narrow the budget deficit to a two-year low of 5.1 percent of gross domestic product and avoid a ratings downgrade. The state refiners lost 738.2 billion rupees ($14 billion) from selling diesel below cost in the nine months ended Dec. 31, making up 59 percent of the total loss on fuel sales.

“This is by far the single biggest endorsement to the world that India is taking the difficult decisions to restore growth,” Abhay Laijawala, the Mumbai-based managing director and head of research at Deutsche Equities India Pvt. said.“This is a big positive from the point of view of the fiscal deficit for the next year.”

Subsidy Loss

Refiners are losing 9.6 rupees on every liter of diesel they sell, according to oil ministry data. Losses on kerosene amount to 30.64 rupees a liter and on cooking gas to 490.50 rupees per 14.2 kilogram (31 pound) bottle. Prices of the fuels weren’t immediately raised by the government, Oil Minister Veerappa Moily told reporters in New Delhi.

The cabinet also raised the number of subsidized cooking gas cylinders allowed per household to nine from six annually, Chaturvedi said.

Chidambaram said he’s not expecting small diesel price increases to reduce the country’s fuel subsidy bill, Bloomberg TV India reported today. He didn’t specify a timeframe.

Higher diesel prices can increase inflation as the fuel in used in trucks for transportation and by farmers to run pumps. Inflation in December rose 7.18 percent from a year earlier, the slowest pace in three years.

“If it’s implemented, this will help the refiners slowly wipe out the loss on diesel over time,” Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. (GBNP), said by phone from the south Indian city of Kochi. “The fiscal gap will also be reduced and that’s a big positive.”