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Yesterday was a bad day for oil stocks as several of them tanked. The indices were hammered and notable oil stocks fell significantly, but what caused the decline?
The decline was triggered after the government raised export duties on gasoline, diesel & jet fuel and levied a windfall tax on these companies. A government notification also stated that exporters have been asked to meet local sales commitments.
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Moreover, gasoline exporters have been asked to give a self-declaration that 50% of the quantity specified in the shipping bill has been or will be supplied in the domestic market during the FY. For diesel, the requirement is 30%.
A windfall tax can be described as a higher tax rate on sudden big profits levied on a particular company or industry. In this case, the gains are on account of the rising crude prices as oil behemoths have posted record margins.
The government has charged a Rs 6 per liter tax on the export of petrol and jet fuel and a Rs 13 tax on the export of diesel. Moreover, an additional tax of Rs 23,250 per tonne has been levied on domestically produced crude oil.
The government took these steps to control the domestic prices which had spiked. Improved refining margins and high demand in European nations motivated exporters to export more, resulting in domestic inflation.
This improves the government's tax revenue and helps it bring down its current account deficit, thereby helping the Indian Rupee rise.
India is not the only country to apply such taxation on oil. Italy, in early May, announced an increment in its existing windfall tax to 25% to offset rising prices of electricity, gas, and petrol. In late May, the UK also increased such rate to 65%!
"We are happy that exports are giving them that kind of return on investment. But these are extraordinary times. These are times when oil prices internationally are unbridled. For any country like India, which depends largely on imports, we also need to pay that kind of money to get imports," Finance Minister Nirmala Sitharaman said.
The government has clarified that the tax will be applicable on SEZs and EOUs as well. However, the government clarified that it was not their intention to discourage exports or India as a refining hub and that the taxation would be assessed every 15 days to see how things are working out.
For the first day of the second quarter, the indices closed in the red as Sensex tumbled 111.01 points or 0.21% to close at 52,907.93 while Nifty fell 28.20 points or 0.18% to end the day at 15,752.05.
The Power and Gas industry was the biggest loser on Friday as ONGC lost the most yesterday, falling 13.53% in a single day, to close at Rs 131.05 per share, with a volume of 125.79 million. Vedanta, which has oil rigs, declined 4% while Chennai Petroleum fell 5.2%.
The stock of MRPL also registered a significant correction as it corrected a massive 10%. Reliance witnessed an overwhelming volume of 37.84 million as it contracted 7.20% to Rs 2,408.70 per share as the stock was enough to drag down the indices by itself.
What is the future outlook?
Oil companies, both private and public, have reported significant profits as the prices of oil have been skyrocketing due to the Russia-Ukraine conflict. However, these taxes and levies will significantly dent the Gross Refining Margins of oil refiners.
Their profitability will be affected as government companies like ONGC and OIL will have to reduce dividend payments and compromise on any share buyback plans. Brent currently trades around $111 per barrel and is expected to stay above that for the next 12-18 months according to some analysts. JP Morgan Chase says that a 3 million daily barrel cut to daily supplies could send the price up to $190 and a 5 million cut could mean a "stratospheric $380 crude".
The oil stocks, which were seeing significant movement and greater investor interest, could see a greater correction from this levy.
Article by Aman Agarwal.
This news piece is brought to you in association with jobaaj.com
