Despite the fact that diesel is cheaper than gasoline in international markets, diesel price is at par with the gasoline price in the local market, analysts said. They said that after a gap of one year, diesel prices are trading lower than gasoline prices in the international oil markets.
According to Ogra, oil pricing sheet diesel price was $47 per barrel (Rs 23.5 per litre) while gasoline (petrol) price was $50.8 per barrel (Rs 25.4 per litre) in February 2009. This trend continued in March 2009 as well. Historical analysis shows that during February 08-February 09, diesel prices were higher than gasoline while during 2005-07 prices were more or less at par.
Farhan Mahmood, an analyst at JS Global Capital, said that generally the factors like availability of a products substitute and demand mix affects the price differential between these products. That said, product with fewer substitutes increases more sharply when crude oil prices increase, while product demand for particular period also affects the relative product pricing. Last year, due to economic boom in Middle East and China, demand for diesel rose sharply, he added.
Now with oil demand lower by 3 million barrels per day amid global economic downturn, demand for diesel (which has 36 percent share in oil consumption) is expected to slowdown. "It is likely that oil market will not see the same diesel price premium over gasoline as we saw last year, at least for short term", he said. The graph below signifies that diesel price saw sharp decline in last 3 months whereas gasoline prices rallied in tandem with the crude oil prices which led to product price disparity, he added.
Compared to international prices, local retail prices of gasoline and diesel are at par ie both at Rs 57 per litre. This is due to the fact that apart from sales tax, government is collecting additional revenues of Rs 19.15 per litre (Rs 2.8-3.0 billion per month) on petrol and Rs 17.77 per litre on diesel (Rs 11-12 billion per month) under the head PDL.
Besides, collecting Rs 17.77 per litre PDL on diesel, government is also giving an incentive to refineries via deemed duty of Rs 1.9 per litre (at current oil prices and exchange rate) which is also included in diesel pricing. During July-December 2008, total PDL collection on both the products stood at Rs 28.8 billion, as per Ministry of Finance.
It is estimated that this amount is expected to rise to Rs 70 billion by the end of March 2009, he said. Thus, if international and local oil products prices remain the same, the total collection under PDL would easily reach Rs 115 billion by June, he added. The government in the beginning of the fiscal year projected PDL at Rs 14 billion.
He said that the decline in diesel prices relative to gasoline will hurt local refineries margins, as they are more skewed towards diesel production. However, the recent reports on government decision to raise deemed duty from 7.5 percent to 10 percent will support the diesel margins going forward. As far as OMCs are concerned, with fixation of diesel margin irrespective of international crude oil prices, there will be no impact in OMCs, he added.
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