Markets
Oil is on the boil but OMC margins are holding firm
Summary
Global oil prices have been rising over the past few months. Last week, Brent crude averaged at $84.9/barrel, which is $2.5/barrel higher than the last week’s averageThe prospects of oil marketing companies (OMCs) Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL), and Indian Oil Corp. Ltd (IOC) are looking up. The rebound in fuel demand after Covid 2.0 has helped improve the outlook on volume. As such, marketing margins of the companies have remained firm and the outlook on refining margins has continued to improve, boosting Street confidence.
That explains why the shares of HPCL and IOC scaled 52-week highs on Monday, taking the total gains in FY22 so far to 41-49%. BPCL, on the other hand, has gained only 6%, largely due to the slow progress on its privatization process.
The improvement in marketing margins comes despite the surge in crude oil prices. Global oil prices have been rising over the past few months. Last week, Brent crude averaged at $84.9/barrel, which is $2.5/barrel higher than the last week’s average, according to Antique Stock Broking Ltd. Notwithstanding this, the marketing margin on petrol was ₹3.05 per litre and that for diesel was ₹3.27 per litre. This is closer to the average marketing margin of the past several quarters. In essence, it shows that the companies have been able to hold on to their margins.
That said, a surge in crude oil prices also increases the need for working capital among OMCs as they need to spend more on imports. Meanwhile, as global demand picks up for fuel, it is leading to an improvement in refining margins.
The benchmark Singapore gross refining margins averaged around $3.7 a barrel in Q2, which is higher than the average of $2.1 a barrel seen in Q1 and $1.8 a barrel in Q4FY21. Analysts at Antique said refining fundamentals are robust, with global demand-supply balance likely to be restored to 2019 levels. They expect re-rating of OMCs and find the current valuations attractive.
