Pricing pressures reduce revenues for fuel retailers

NEW DELHI : Pressure on marketing margins remains a major concern for petroleum marketing companies (OMCs) which have also benefited from a rebound in gross refining margins (GRMs) and strong growth in automotive fuel volumes.

Fitch Ratings said it expects demand for petroleum products from India to remain robust, driven by 7.8% GDP growth forecast for FY23. GRMs are moderating but remain near mid-cycle levels in the second half of FY23. ‘year.

Although crude oil prices jumped around $77 a barrel early in the calendar year and Brent even broke through $130 in the first quarter, retail automotive fuel prices haven’t changed much. This hurt OMC’s performance in the first quarter and also risks limiting future earnings.

Analysts at Yes Securities Ltd said the lack of domestic, retail, gasoline and diesel price revisions, despite international commodity prices hitting record highs in the aftermath of the Russian-Ukrainian conflict , led to a significant decline in marketing margins, which were gradually amplified by marketing inventory losses. .

While Indian Oil Corp. Ltd (IOC) managed to post 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) recorded operating losses of approximately 5,900 crores and 12,500 crores, respectively. This is despite the companies announcing robust GRMs, which soared as Singapore’s benchmark GRM averaged around $21.4 per barrel in the June quarter, representing a significant jump from the $8 a barrel in the March quarter. These were aided by improved diesel and petrol cracks. Lower Russian and Chinese exports of refined products also affected supply and demand dynamics at a time when demand recovered in the United States and Europe, and inventories remained at multi-year lows. .

As a result, GRMs for IOCL, BPCL and HPCL settled at $31.8, $27.5 and $16.7 per barrel, respectively, well above $18.5, $15.3 per barrel. and $12.44 they brought in in the fourth quarter, according to analysts’ calculations. The GRM for HPCL was comparatively weaker as the company has yet to benefit from the expansion of its Vizag refinery. For BPCL, the Bina refinery merger helped dampen overall margins, analysts said.

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

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

The recent drop in crude prices should, however, provide some respite. JM Financial analysts, in their August 7 earnings review reports, said the OMC auto fuel under-recovery declined to 3 the liter at present from a maximum of 15-16/liter in the first quarter of FY23 due to lower crude prices and moderating product cracks.

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