Oil marketers’ shares hit 52-week highs on margin hopes

The companies are expected to report a strong performance during Q1 helped by good marketing margins. Although benchmark refining margins declined during Q1, discounted crude sourced from Russia is likely to support refining margins for oil marketing companies, analysts said.

While oil prices have inched up recently from lows, led by deepening production cuts announced by the various oil producing nations, analysts do not see much upside for oil prices amidst weak China demand, global slowdown concern and adequate global reserves and supplies.

Analysts at Jefferies India Pvt Ltd said OMC profitability during Q1 should spike on marketing strength, despite refining weakness. The OMCs, after suffering significant losses on marketing auto fuels during 2022 amidst high crude price environment, saw strong rebound in marketing performance during the Q4 FY23 amidst declining oil prices. The momentum is likely to continue in Q1 FY24.

Analysts at ICICI Securities said marketing margins, after showing steep losses over the first half of FY23, have steadily recovered over the last four months and they estimate petrol and diesel margins at a stellar ₹8-9 a litre in Q1. Moderation in both crude costs and softer product prices are likely to benefit OMCs’ marketing earnings in Q1, they said.

The OMCs are being allowed to recover their losses on marketing during a high crude price environment. The blended auto fuel margins stood at ₹3 a litre during Q4 which are likely to improve to ₹9 a litre during Q1, said Avishek Datta, senior analyst at Prabhudas Lilladher.

With no retail price cut, despite lower international product prices, OMCs’ auto fuel over-recoveries further increased to nearly ₹24,000-25,000 crore in Q1 FY23, on an estimate, said analysts at Kotak Institutional Equities. Auto fuel over-recoveries will more than offset the impact of 50% sequential decline in benchmark gross refining margins (GRM), they added.

The benchmark Singapore GRMs averaged lower at $4.1 a barrel versus $8.2 a barrel in Q4 FY23, due to drop in diesel and ATF spreads by $12 a barrel as per analysts’ data.

Lower refining spreads will be partly compensated by continued sourcing of discounted Russian crude, said Prabhudas Lilladher’s Datta. While refining profits will be lower, recovery in marketing margins will drive Q1 net profits.

However, oil prices have started moving up slightly post oil producing nations led by Saudi Arabia resorting to higher production cuts and Russia also supporting the cuts. Nevertheless, analysts do not see a significant rise looking at weak China demand, adequate global supplies and reserves.

An analyst at a domestic brokerage said on condition of anonymity that ideally oil prices should have instantly surged by more than $5 a barrel after the announcements on production cuts. That has not happened as there are demand concerns and adequate supplies, the analyst said, adding that he does not see any concern on outlook for OMCs for now.

JY Lim, oil analyst at S&P Global Commodity Insights said commercial crude and key product stocks have gradually declined from January, and draws are set to accelerate to over 2 million barrels per day in July-August. However, prices have been eroding with sufficient supply to cover prompt needs, and very little interest by financial participants in oil.

Non-commercial net length and long/short positions are at ten-year lows, Lim said, adding there is very little interest in owning oil as an investment now. It will take very visible stock draws to shift that sentiment, he said.