Why refining margins stayed subdued in FY25. Hint: Shrinking Russian discounts

The benchmark Singapore GRMs in the January-March quarter as of February-end stood at $2.7 per barrel, compared with $4 per barrel in the fourth of the previous fiscal, showed data from Icra Ltd. During the third quarter of FY25, the benchmark Singapore GRM was at $5 per barrel.

“Refining margins have been lower due to declining discounts on Russian crude, which currently stand around $2.5-2.8 per barrel, along with the fall in crack spreads for all products, other than naphtha. This quarter also margins may remain soft as crack spreads continue to be subdued. Further, in the previous quarter due to higher winter demand globally both crack spreads and margins were stronger. They usually tend to ease in January," said Prashant Vasisht, senior vice president and co-group head, corporate ratings, Icra.

A year ago, discounts on Russian oil were around $10 per barrel.

Data from the Petroleum Planning and Analysis Cell (PPAC) showed that as of December, the GRM of the public sector OMCs dropped over 50% on a year-on-year basis.

Also read | Actis acquires 100% of Stride Climate Investments from Macquarie Group

The GRM of Indian Oil Corp. Ltd, the largest public sector OMC, fell 72.17% to $3.69 per barrel in the first nine months of FY25, from $13.26 a barrel in the corresponding period of the last fiscal. Similarly, the GRMs of Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) fell 59.57% and 51.93% to $5.95 and $4.73 a barrel, respectively.

Refining margins of Indian refiners and OMCs have been on a downward trend from the highs reached in FY23 amid large discounts on Russian oil.

As of December, Russian oil comprised of about 36% of India’s total oil imports.

Crack spread refers is the pricing difference between a barrel of crude oil and the petroleum products refined from it.

Although refining margins are likely to be subdued, the marketing margins of OMCs are likely to improve as crude prices remain tepid.

According to Hardik Shah, director at CareEdge Ratings, the improved retail margins of OMCs are expected to offset the impact of reduced GRMs, whereby integrated players having a presence in both refining and fuel retailing businesses are expected to be better off compared to standalone refiners.

Also read | ACME Solar plans up to ₹35,000 cr capex by 2027 to boost renewable capacity threefold

An official with an OMC on condition of anonymity said: “Weakening of GRMs would have a bearing on the financials of the OMCs, however, with healthy demand for petrol and diesel, marketing margins should improve which would somewhat offset the impact of fall on refining margins on the financials."

Profits fall

OMCs have reported a decline in their profits so far this fiscal, with Indian Oil reporting an 85.43% fall in consolidated net profit for the nine months ended December at ₹5,421.20 crore. Similarly, Hindustan Petroleum and Bharat Petroleum also have witnessed a fall of 75% and 59% in their profits for the first nine months of the fiscal amid weak refining margins.

Petrol and diesel demand in India has been robust in the past few years leading to higher production, although globally the demand has been slowing in slowdown concerns and electrification efforts.

After an estimated record consumption of 241.8 million tonnes of petroleum products in FY25, India’s product demand is likely to hit a new high of 252.9 million tonnes in the next financial year (FY26) driven by petrol and diesel.

Also read | House panel stresses construction of underground LPG caverns

Post the recalibration of the energy market after Russia’s invasion of Ukraine in February 2022, the oil market is likely to see another phase of changes as the US plans to pump in more oil and gas, and has been persistent on India buying more of the commodities from it.

Although the likelihood of more American oil coming in is high, the trend in refining margins may not see a change in the near term with West Texas Intermediate crude also trading lower. The US is currently the fifth largest supplier of oil to India. Although, talks are underway to increase oil imports from the world's largest producer, share of imports may not immediately shoot up and Russia is expected to remain the top supplier in near term, according to people in the know of the developments.

Queries mailed to Indian Oil, Hindustan Petroleum and Bharat Petroleum remained unanswered till press time.