Lower crude prices give some respite to oil marketing companies

Crude prices slipping to a 10-month low is likely to give respite to oil marketing sompanies (OMCs) such as Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL), and Indian Oil Corporation Ltd (IOCL), which had seen significant pressure on their marketing margins during the higher crude price environment. The trend, however, is likely to reverse if crude prices stay low.

Brent crude prices, which had risen past $120 a barrel in June, have softened to $85 a barrel, a level not seen since before the start of Russia Ukraine war. The ongoing lockdowns to control covid spread in China are adding to demand concerns from the world’s second largest economy. The European countries price cap on Russian crude exports and the building up of the petrol inventory in the US are also among key reasons for the decline in crude prices, despite the continuing Russia Ukraine crisis, as per analysts.

Lower crude prices, however, benefit the Indian economy and OMCs.

The slump in Brent crude price in the past few days has brightened prospects to some extent for India’s OMCs, said analysts at ICICI Securities Ltd. Marketing margins for petrol have jumped to a positive ₹8 a litre (average for Q3 till date) and diesel losses have narrowed to ₹10.6 a litre during the past fortnight, they said. This implies that gross margins for OMCs can improve materially over H2FY23 if the current pricing trend persists for five months, said analysts at ICICI Securities.

OMCs had during Q2 seen overall earnings getting lifted by the one-time LPG subsidy compensation from the government. However, adjusting for LPG subsidy, the net loss works out to ₹11,073 crore, ₹4,823 crore, and ₹6,389 crore for IOCL, BPCL, HPCL respectively, which reflected continued loss in the marketing segment because of negative diesel marketing margin and forex losses, said analysts at Sharekhan.

The respite on the front thus bodes well for the earnings outlook of the companies. Besides, declining crude prices will also mean that the working capital requirement of the OMCs will reduce.

The refining margins meanwhile remain important for earnings of OMCs that are in the business of refining crude oil and thereafter retail marketing and distribution of petroleum products.

The benchmark Singapore gross refining margins (GRMs) during the September quarter had slipped to an average of $7.1/barrel in Q2 from $21.4/barrel in 1QFY23, led by a fall in product cracks. In October refining margins had fallen further because of global slowdown concerns. However, they have recovered well. Analysts at a domestic brokerage said that refining margins remain healthy and could be averaging better than Q2.