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Business News/ Industry / Energy/  OMCs stare at inventory loss yet again as crude slips to record low
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OMCs stare at inventory loss yet again as crude slips to record low

The depreciating rupee is fuelling forex losses and the low gross refining margins are likely to have a cascading effect on the profits of refiners

In the current quarter till date, the price of the Indian basket of crude oil has fallen to $42.59 per barrel from the average price of $61.55 per barrel posted in the three months to June, or almost 30%. Photo: BloombergPremium
In the current quarter till date, the price of the Indian basket of crude oil has fallen to $42.59 per barrel from the average price of $61.55 per barrel posted in the three months to June, or almost 30%. Photo: Bloomberg

Mumbai: August appears to be the cruelest month for state-run oil refiners. After posting record profits and inventory gain in the first quarter of 2015-16, they are staring at an inventory loss, as Brent crude price fell to a six-and-a-half-year low in August.

The depreciating rupee is fuelling forex losses and the low gross refining margins (GRMs)—profit earned on each barrel of crude oil processed—are likely to have a cascading effect on the profits of refiners.

That means the second quarter (July-September) results of Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) are unlikely to be rosy.

“This will be the quarter when the state-owned refiners will be having a tough task to keep their heads above water. They will have to deal with substantial losses," said an executive from the international trading division of a private refining company.

The executive declined to be named as he is not authorized to speak to the media.

Usually, oil marketing companies (OMCs) hold inventory of crude oil for 25-30 days. When the price of crude rises or falls sharply during a quarter, they post a gain or loss accordingly on their inventory, which is based on the average monthly price of the Indian crude basket.

In the current quarter till date, the price of the Indian basket of crude oil has fallen to $42.59 per barrel from the average price of $61.55 per barrel posted in the three months to June, or almost 30%.

The Indian crude oil basket represents a derived basket comprising sour grade (Oman and Dubai average) and sweet grade (Brent dated) of crude oil processed in Indian refineries in the approximate ratio of 75% of Oman and Dubai, and 25% of Brent, as per Petroleum Planning and Analysis Cell (PPAC), a statistical body under the oil ministry. The Indian crude basket is usually $3 per barrel less than the benchmark Brent crude. “While another month is left for the quarter to end, if the price of the Indian basket stays below $50 per barrel, OMCs might post a loss of $8-10 per barrel on their inventory," the executive quoted above said.

This can lead to a total inventory loss of between 3,000 and 5,000 crore considering crude oil inventory of roughly 8 million tonnes that the companies are likely to maintain against a quarterly consumption of 24 million tonnes and an estimated average quarterly rupee-dollar exchange rate of 65 per dollar.

However, this could go up or down based on price of crude in September, the executive said.

P. Balasubramanian, director (finance) of BPCL, in a recent interview, said that the company will see an inventory loss after two quarters. He declined to put a figure to the expected loss as he said factors such as foreign exchange and refining margin will also have an impact on the overall net profit of the company.

Analysts say the companies are expected to take a hit this quarter on their forex exposures as well as lower GRMs.

“The GRMs have fallen by almost 35% from the last quarter and the outlook is not too promising," said an analyst with a domestic brokerage.

“While in the fourth quarter of last fiscal, OMCs managed to offset their inventory loss through higher GRMs, the second quarter will add to the hit of inventory," the analyst said. He did not wish to be named on account of his company policy. In the current quarter, the GRMs have come down to $5.5 per barrel from an average GRM of $8.5 per barrel in the last quarter, this analyst said, adding that even the sudden change in the price of rupee-to-dollar ratio will also lead to high forex losses for the companies.

The three OMCs together posted a total inventory loss of 7,374 crore and a forex loss 558 crore in 2014-15.

In the first quarter of the current fiscal, the OMCs posted a total inventory gain of 970 crore and forex loss of 430 crore. They, however, posted record net profit of 10,400 crore in the first quarter.

The OMCs together posted a total net profit of 13,500 crore in the last financial year.

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Published: 28 Aug 2015, 01:09 AM IST
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