Keeping fuel prices steady during turmoil comes with a price

Shares of OMCs have been volatile over the past week; however, in the last one month, they have seen an uptrend.
Shares of OMCs have been volatile over the past week; however, in the last one month, they have seen an uptrend.

Summary

  • High oil prices and little likelihood of higher retail prices will squeeze the marketing margins of state-owned OMCs

An escalation in West Asia could ignite crude oil prices and hurt marketing margins of India's oil marketing companies (OMC), given their limited space to raise fuel prices in an election season. With crude prices crossing $90 per barrel last week and fears that it could go beyond $100 if the conflict flares up, concerns have grown in the energy market.

High oil prices and little likelihood of higher retail prices will squeeze the marketing margins of state-owned OMCs, experts said. Marketing margin is the difference between the cost of the refined product, say petrol or diesel, and the retail sale price.

“Although the situation has not escalated so far, in case there is a major disruption on the Strait of Hormuz, even $100 per barrel looks less. Prices may surge further as the Strait handles transport of about 25% of the global oil consumption. And a surge in crude price is negative for OMCs. Marketing margin on sale of diesel is hardly about a rupee and that on petrol is around 5 per litre," said Swarnendu Bhushan, co-head of research at Prabhudas Lilladher Pvt. Ltd.

Shares of OMCs have been volatile over the past week; however, in the last one month, they have seen an uptrend. IOCL shares have increased about 5% to 169.05, while those of BPCL and HPCL increased nearly 2% to 592.65 and 469 respectively.

"The under-recovery on diesel is about a rupee, while in the case of petrol, they making handsome profits of about 3.2 per litre. However, if crude prices surge, OMCs may return to under-recoveries in petrol sales," Bhushan added. Under-recovery is the notional loss or difference between the retail price of the fuel and the international price.

An increase of $1 per barrel of crude necessitates a 50 paise increase in petrol price, Bhushan said, adding in case of a $6 increase, OMCs may witness under-recoveries.

Prashant Vasisht, senior vice-president and co-group head, corporate ratings, ICRA, said, "Marketing margins have declined in April 2024 with the rise in oil prices along with reduction in retail selling prices from 15 March. ICRA estimates that the OMCs’ net realization is higher by 2 per litre for petrol and marginal loss for diesel vis-a-vis international product prices in April 2024."

OMCs had cut prices of both petrol and diesel by about 2 last month, just before the stare of the model code of conduct for the general election from 19 April to 1 June.

Queries sent to the Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd remained unanswered till press time.

Vasisht of ICRA, however, added that the impact on marketing margins may be offset by healthy refining margins. He noted that OMCs have reported robust refining margins and are expected to continue the momentum. GRM is the difference between the costs of raw material, mostly crude oil and weighted average prices of petroleum products.

According to ICRA, the benchmark Singapore Gross Refining Margins in April stand at about $3.4 per barrel. In February and March, the GRM was at $7.7 and $5.5 per barrel.

The three state-run OMCs have reported healthy profits in the past few quarters as crude prices stayed subdued and retail prices unchanged. Similar robust financials are expected for the last quarter of FY24.

However, in the ongoing June quarter, margins may see a dip compared to the previous quarter. In a recent note, ICICI Securities said that in the absence of any decline in international prices and low possibility of retail prices hikes before the elections, retail margins during the quarter may see a sharp downturn.

Crude prices crossed $90 last week, the highest levels since October last year. At the time of writing this report, the June contract of Brent on the Intercontinental Exchange was trading at $89.85 per barrel, lower by 0.28% from its previous close.

Moody's Analytics on Monday had said that oil prices may add another $5 per barrel taking the prices up to $95 per barrel. "Now that the attack has happened, we expect oil prices to add another $5 per barrel to the risk premium, pushing oil to the $90 to $95 per barrel range," it said. It also noted that in case of further escalation, prices may hit the $100 per barrel mark.

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS