BackFor oil refiners, things have gone from bad to worse in March quarter
There could be respite due to higher auto fuel marketing margins; extent of gains remains to be seenThe 21-day nationwide lockdown is expected to impact fuel demand, as all kinds of transportation activity has diminished greatly
PremiumWhen oil prices declined sharply in early March, everyone hoped refining margins would get a boost thanks to lower procurement costs. True, demand outlook was soft even at that time. However, lockdowns in many parts of the world owing to the covid-19 outbreak have worsened the demand outlook drastically in a short span of time.
The benchmark Singapore gross refining margin (GRM) is estimated to have averaged only $1.20 a barrel up to 27 March in the quarter, compared to $1.70 per barrel in the December quarter. In fact, in the second half of March, the measure dropped into negative territory, largely owing to the collapse in demand for jet fuel.
This would obviously weigh on state-run oil marketing companies (OMCs) Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC).
“Very weak Singapore GRMs, complete collapse of fuel demand due to the shutdown and even refining throughput shutdown coupled with the inventory loss owing to a $12 per barrel decline in average crude prices (and much sharper $30 per barrel dip over the 2nd-3rd week of March) will combine to deliver a very weak March and June quarter," wrote analysts at Centrum Broking Ltd in a report on 1 April.
The 21-day nationwide lockdown is expected to impact fuel demand, as all kinds of transportation activity has diminished greatly.
But there could be respite due to higher auto fuel marketing margins. However, the extent of gains from the marketing segment remains to be seen.
So far in 2020, shares of OMCs have declined in the range of 30-38%. “We recently cut refinery throughput of OMCs 11-21%. We now expect 26%/20%/75% earnings growth in financial year 2021 at IOCL/BPCL/HPCL, primarily due to a low base in FY20 owing to refinery shutdowns," said analysts at Edelweiss Securities Ltd in a report on 31 March.
Meanwhile, shares of oil producers Oil and Natural Gas Corp. Ltd and Oil India Ltd have fallen more sharply by 48-49%. Lower oil prices are expected to hurt price realizations of these companies. Domestic gas prices too have declined, which will affect realizations of the gas segment. The shutdown will also affect production numbers.
In general, outlook for producers remains grim, with scope for increase in crude oil prices being limited thanks to the huge global supplies accompanied with subdued demand.
All said, investors would wait for meaningful signs of demand recovery to feel confident about shares of oil companies, notwithstanding the substantially lower valuations.
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