Oil marketing companies find themselves in a spot as oil prices have trended higher over the past few weeks, with little prospect of raising retail prices in the medium term, at least until the general elections next year.
Higher oil prices and higher cracks, which have led to under-recovery, point to a tough second half of FY24 for them.
In the week to September 10, refining benchmarks have declined 15 per cent to $10.3 a barrel, accompanied by a modest increase in marketing margins; however, margins have decreased sharply in the current quarter to date, Nomura said in a note on the sector. It observed that OMCs are recording under-recoveries of Rs 5.6 a litre on the sale of auto fuels.
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Last week, OPEC leaders led by Saudi Arabia and Russia, extended their oil production cuts, leading to an immediate hike in oil and fuel prices. With both countries extending their production cuts till the end of 2023, the situation is likely to remain tight till then. Oil prices have moved up to $90 a barrel in recent weeks. Fuel crack margins - the difference between oil prices and petroleum products - are higher, and this is likely to hurt OMCs, as retail prices are frozen.
“Oil prices can get firmer in the short term. With key elections not far away, retail price hikes are unlikely,” said a note by Kotak Institutional Equities. It added that inventory gains are likely to help the OMCs in the current quarter, but the second-half will be tough if oil prices remain firm. The broker has a ‘reduce’ rating on the public sector OMCs -- BPCL, HPCL and IOC.
At the retail level, India is grappling with high food inflation and the government has to tread a tricky path in reining in inflation, while ensuring that fuel prices do not get out of control ahead of the elections.
US investment bank Jefferies said diesel marketing margins are deep in the red, as the production cuts coincide with 20-year-low oil inventories in the US.
OMCs benefited from low oil prices at the start of 2023, with margins of Rs 8-10 a litre. With a rise in oil prices, those gains have diminished, while margins on petrol have fallen to less than half, and they are making marketing losses on diesel. Jefferies said. HPCL is likely to be worst affected as it has the most adverse marketing-to-refining ratio among the pack.
In India, with retail prices steady, fuel consumption has also been above pre-COVID levels. In August fuel consumption was at 18.6 million tonnes, up 6.5 per cent on year, and more than 3 per cent higher on pre-pandemic levels.
Another area of concern for OMCs is higher capex as they allocate more towards achieving zero emission targets. Cumulatively, they are expected to spend around Rs 4 lakh crore, but the return ratios will likely be lower, said Jefferies.