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MOSL: OIL & GAS-LPG subsidy: Moving closer to free market pricing

Oil & Gas: LPG subsidy: Moving closer to free market pricing

 

• The oil marketing companies (OMCs) incurred gross under-recoveries of INR433b in FY19, of which LPG accounted for INR315b (~73%).
• Amidst a benign oil price environment, the OMCs appear to have been raising the prices of subsidized LPG cylinders since the past few months.
• Raising prices of subsidized LPG cylinder augurs well for the OMCs, especially keeping in mind the intended privatization of BPCL. However, the resolve of the government would be tested if oil prices spike. 

LPG cracks to remain under pressure

• The spurt in production of US natural gas-based liquids has already changed the world trade flow of LPG, pushing Saudi Aramco/Mont Belvieu propane price ratio from 1x in 2000 to 1.7x in 2019.
• The US has already become the largest LPG exporter and the dominance is likely to increase even further, pushing down LPG cracks.
• In 1HFY20, LPG accounted for INR113b of gross under-recoveries of INR140b. The expected low LPG prices make a favorable case for the OMCs to break the largest shackle of LPG under-recovery after the deregulation of diesel in 2014.