OMC marketing margins improve in December after extended period of decline

Lower global crude prices, higher gross refining margins have driven overall marketing margins upwards

After a long period of decline, the marketing margins of India's state-owned oil majors have begun to improve in December, and are set to continue on an upward trajectory, analysts believe.

The blended marketing margin for petrol and diesel reached a 10-month high of Rs 2.4 per litre on December 13, according to a note issued by ICICI Securities.

This is in stark contrast to the first eight months of the ongoing financial year, when oil marketing companies (OMCs) were hurt by pump prices that remained unchanged amid the volatility in global crude oil prices and supply costs, said a report by Motilal Oswal Research, released over the weekend.

OMCs have incurred average marketing losses of Rs 9.5 a litre on diesel and Rs 0.1 per liter on petrol so far in FY23, it said.

Logistics issues on the supply side remain a major headache for OMCs such as Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), as the diplomatic standoff between Western nations and Russia continues to harden in the wake of the war in Ukraine.

However, falling crude prices and higher gross refining margins (GRM) have meant that overall marketing margins have begun to steadily improve during the past two months.

The situation has eased individually for both petrol and diesel as well. The marketing margin on petrol has improved to Rs 9.7 a litre so far in the ongoing third quarter of FY23, after posting a loss in the preceding two quarters.

The Crude oil price remains volatile, plummeting to $79.2 a barrel at the time of writing this report. Industry sources said the phenomenon is expected to continue in the near-to-medium term due to the ongoing Ukraine crisis, active quota management by the Opec+ bloc of oil producing nations and demand woes.

The loss on diesel narrowed to Rs 3.6 per liter in the third quarter, from Rs 12.4 per liter in the second quarter of FY23. This was due to the cooling off in benchmark diesel prices, which fell to $110.3 per barrel in the third quarter, after touching a record high of $167.3 in the second quarter.

A change of $1 per barrel in benchmark petrol or diesel prices generally impacts margin by 52 paise per litre.

Rising GRM

In recent months, the losses in the marketing segment have been partially offset by record high GRMs in FY23. GRM is the amount that refiners earn from turning every barrel of crude oil into refined fuel products.

Average GRMs for the third quarter till date have sustained at $13-16 a barrel for the three OMCs, ICICI Securities said.

With the supply of refined products petering out following supply disruptions in Russia and lower export of petroleum products from China, Indian refiners have seen their earnings go up. A case in point: the benchmark Singapore GRM (SG GRM) has hit a record high $11.4 per barrel in FY23 till date.

IOCL has been the biggest beneficiary of high GRMs, while highest marketing leverage has put HPCL in most disadvantageous position, Motilal Oswal Research pointed out.

"We assume a GRM of $12.05 per barrel for IOCL, $10.7 per barrel for BPCL and $5.9 per barrel for HPCL in FY23," it said.

Going forward

However, despite the improvement in marketing margin from the first half of FY23, OMCs are expected to clock a combined operating loss of Rs 31,500 crore in the marketing segment this financial year, the analyst said.

This would be the case after accounting for the one-time grant of Rs 22,000 crore by the Centre in October.

Industry experts also warn that GRMs have shown signs of extreme fluctuations in recent months and banking on high GRMs may not be sustainable. Data shows for a brief period in September, SG GRM had even turned negative, down from the peak of $24.5 per barrel in June.

Marketing margins rise

• Blended marketing margins hit a 10-month high on Dec 13
• Average gross refining margins at $13-16 in Q3
• Keeping pump prices unchanged during global volatility has hit OMCs
• Average marketing losses for FY23 so far at Rs 9.5/litre for diesel, Rs 0.1/litre for petrol
• Despite recent gains, combined loss to OMCs pegged at Rs 31,500 crore in FY23