Lower oil prices to aid OMCs’ marketing margin outlook
2 min read 23 Mar 2023, 01:22 AM ISTLow-cost crude would also lead to a drop in working capital needs of OMCs since they have to pay less for oil imports
PremiumSoftening crude oil prices after staying elevated for more than a year since the start of the Russia-Ukraine war in February 2022 bode well for domestic refiners as well as for the broader economy.
Just as the fall in retail fuel prices is positive for the Indian economy, lower crude prices are also favourable for oil marketing companies (OMCs) engaged in the refining and marketing of petroleum products. These firms had faced pressures on marketing margins when crude prices rallied. Apart from boosting their marketing margins, lower crude prices would also lead to a drop in working capital needs of the OMCs since they have to pay less for oil imports. Some softening of crude prices in the December quarter has already led to improved performance, reducing losses on marketing.
The benchmark Brent averaged about $88 a barrel in Q3 FY23, down 11% sequentially, and all three oil marketing companies —Indian Oil Corp. Ltd (IOCL), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL)—saw their marketing margins improve and earnings rebound in Q3, compared to the first half of FY23.
OMCs are likely to record strong improvement in operating performance this quarter, compared to the December quarter, said Avishek Datta, a research analyst at Prabhudas Lilladher Pvt Ltd.
Marketing margins are likely to have rebounded to ₹5 a litre for OMCs in Q4 FY23, as per analysts, compared to negative margins in the first three quarters of FY23. Though refining margins have fallen broadly, and by about 30% in the case of diesel, they are expected to be still better than what the OMCs earned during the pandemic.
Analysts at Anand Rathi Research too said that falling crude prices would be positive for state-run oil and gas companies as it would bring down their energy costs, boosting demand besides lowering the need for working capital.
OMCs can better manage profitability by adjusting marketing margins, supported by more Russian discounted-crude sourcing, they added. In January and February, Indian refiners sourced 20-35% of their crude requirements from Russia, said analysts.
Market worries that risks in the global banking sector could spark a recession and dent fuel demand is driving the latest correction in crude prices. Prices have also been pressurized as the Energy Information Administration said US shale crude oil production in the seven biggest shale basins is expected to rise in April to its highest since December 2019, as per analysts. This may keep oil prices under check in the near term. Analysts feel that crude prices could remain around similar levels, considering the current inventory levels. While the improvement in operating metrics is positive for all the three OMCs, the impact on performance of each company differs based on their portfolio and level of exposure to the refining segment compared to the marketing segment.
Looking at the mix for the three companies, HPCL with its larger dependence on marketing appears poised to benefit the most from the current momentum, while IOCL could have the least benefit, said analysts at ICICI Securities.
Its calculations suggest that for every ₹1.5 a litre expansion in blended retail margins, HPCL’s consolidated earnings per share can jump 48%, while for IOCL and BPCL, it is 29% and 42%, respectively
