Pricing pressures shrink fuel retailers’ earnings

NEW DELHI : Pressure on marketing margins remains a key concern for oil marketing companies (OMC) that would otherwise benefit from a rebound in gross refining margins (GRMs) and the strong volume growth in auto fuels.

Fitch Ratings said that it expects India’s petroleum product demand to remain robust, driven by GDP growth of 7.8% forecast for FY23. It expects GRMs to moderate but stay close to mid-cycle levels in the second half of FY23. Nevertheless, large marketing losses at OMCs are likely to more than offset the benefits from strong GRMs during the year.

Though crude oil prices have surged from around $77 a barrel levels at the start of the calendar year and Brent even crossed $130 during the first quarter, retail auto fuel prices have not changed much. This had hurt the Q1 performance of OMCs and is likely to restrict future earnings too.

Analysts at Yes Securities Ltd said the lack of in domestic, retail, petrol and despite international product prices touching record highs in the aftermath of the Russia-Ukraine conflict diesel prices resulted in significantly weaker marketing margins, which were incrementally amplified by marketing inventory losses .

While Indian Oil Corp. Ltd (IOC) managed to report an operating profit of 1,750 crore (down 84% from a year ago and 85% sequentially), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) reported operating losses of around 5,900 crore and 12,500 crore, respectively. This was even though companies reported robust GRMs, which soared as the benchmark Singapore GRM averaged at around $21.4/barrel in the June quarter, which was a significant jump from $8 a barrel seen in the March quarter. These were helped by improving diesel and petroleum cracks. The decline in Russian and Chinese exports of refined products also hit demand-supply dynamics at a time demand recovered in the US and Europe, and inventories remained at multi-year lows.

As a result, GRMs for IOCL, BPCL and HPCL stood at $31.8, $27.5 and $16.7 a barrel, respectively, significantly above $18.5, $15.3 a barrel and $12.44 they reported during Q4, as per analysts’ calculations. The GRM for HPCL was comparatively weaker, as the company is yet to accrue the benefit of expansion at its Vizag refinery. For BPCL, the merger of the Bina refinery helped cushion overall margins, said analysts.

On the positive side, volume growth remains very strong and is seen in a positive light. Nevertheless, high crude prices will crimp marketing margins.

A state of prolonged government interference in auto fuel retail prices and losses at OMCs would be negative for the standalone credit profile of OMCs and may lead to a rethink of the government’s approach to fuel prices, analysts at Fitch Ratings said. “We believe freedom for OMCs to control retail fuel prices would support government attempts to re-initiate the divestment of BPCL, should it choose to do so,” they added.

The recent decline in crude prices, however, should provide some respite. Analysts at JM Financial, in their result review reports on 7 August, had said OMCs’ auto fuel under-recovery has declined to 3 a liter at present from a high of 15-16/liter in the first quarter of FY23 due to a fall in crude price and moderation in product cracks.

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