Home >Markets >Mark To Market >Why shares of oil marketing companies are on a slippery slope

Brent crude prices rose on Monday, a day when the Organization of the Petroleum Exporting Countries (Opec) and other oil producers met in Vienna. Crude oil prices increased on expectations that Opec and its friends will extend their supply cuts.

Back home, expectations of crude oil prices firming up sent jitters across shares of state-run oil marketing companies (OMCs), taking them lower by 2.4-4.1%. OMCs include Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd. Typically, investors worry whether these companies will be able to pass on higher crude oil prices to end consumers.

Still, it’s not as if sentiments were rosy for these companies to begin with. Sure, the benchmark Singapore gross refining margin (GRM) is estimated to have marginally improved in the June quarter on a sequential basis. For the March quarter, Singapore GRM stood at $3.20 a barrel. However, a slight gain in refining margin from its ultra-low level in the March quarter is hardly anything to get excited about. In any case, the year-on-year deterioration in performance is expected to have been huge in Q1 FY20.

“Owing to weaker refining environment, marketing and refining inventory losses, and tepid growth in domestic petroleum consumption, we expect OMCs to report 80-90% lower earnings year-on-year during 1QFY20," said Antique Stock Broking Ltd in a report on 26 June. Healthier marketing margins are the only saving grace, it added.

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Vipul Sharma/Mint

But investors cannot take it for granted that the marketing margin gains will continue to save the day, like they did during the March quarter.

“We doubt if OMCs will be able to sustain auto fuel margins at elevated levels even if crude prices were to remain steady or fall further," said a report from Kotak Institutional Equities on 27 June. “(They) are unlikely to sustain amid a constrained fiscal environment, which may warrant a hike in excise duties, and slower demand growth."

Simply put, the above-mentioned factors are likely to keep investors on the edge in the near future. True, OMC stocks have recovered their early October losses, when the government had asked these companies to forego a portion of their marketing margins. However, they are subdued since the beginning of FY20, suggesting investors are adopting a cautious approach.

Going ahead, global refining capacity addition is expected to be more than demand, capping margin expansion. Diesel demand in China, a big market for the global oil industry, has taken a beating lately and that’s a dampener.

Nonetheless, investors will watch whether refining margins get a fillip a few months down the line, as the International Maritime Organization’s new regulations come into effect in 2020. Until then, appreciation in OMC shares may not be too refined.

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