OMC marketing earnings expected to rise in fourth quarter, say analysts

Continuing volatility in international crude and product prices is likely to benefit marketing earnings of oil marketing companies (OMCs) in the fourth quarter of 2022-23, according to analysts.

State run-companies such as IOCL, BPCL and HPCL are expected to see a strong sequential improvement in operating earnings in Q4, results of which are set to be released in the coming days. As a result, margins on diesel are set to turn positive for the first time in the past five quarters, a report by ICICI Securities said.

“Post record-high losses of Rs 17.4 per litre on petrol and Rs 27.7 per litre on diesel for the week ended 24th Jun’22, margins have steadily improved over the past 6 months,” it said.

Blended marketing margins rose to a 10-month high of about Rs 2.5 per litre in December, multiple analysts said. The marketing margin on petrol has improved to nearly Rs 10 litre in the third quarter of FY23, after posting a loss in the preceding two quarters.

However, for the domestic refiners, diesel accounts for 45 per cent of refining volumes where spreads are down $14 per barrel bbl quarter-on-quarter. “So, while refining profits will be lower, sharp recovery in marketing margins will drive Q4 profit after tax to Rs 115.7 billion (Rs 11,570 crore) from Rs 27.4 billion (Rs 2,740 crore) in Q3,” Avishek Datta, research analyst at Prabhudas Lilladher, said.

Higher GRMs

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

“We expect OMCs’ results to be operationally better, owing to recovery in marketing gains of blended margins by Rs 3.3 per litre (versus loss of Rs 3 in Q3 despite lower GRMs,” Datta said.

Benchmark Singapore margins were higher at $8.2 per barrel in Q4, compared to $6.1 per barrel in Q3 due to improvement in petrol refining spreads to $19 per barrel, he added.

Public sector OMCs reported cumulative losses of Rs 18,622 crore during the first nine months of FY23 against a profit before tax of Rs 28,360 crore in the same period of FY22, the government told Parliament. This was primarily due to under-recoveries or the difference between the retail selling price and the international rate, for petrol, diesel and LPG.

Crude oil prices have faced unprecedented volatility following the Russia-Ukraine war in February 2022 and the freeze on the pump prices of both the auto fuels since April 6, 2022, the government said.

Prices for petrol and diesel in India (Delhi) increased by 1.37 per cent and 3.4 per cent, respectively, over the period of January 2022 to January 2023, data compiled by Petroleum Planning and Analysis Cell (PPAC) showed. As compared to this, developed countries such as the US have seen increases by about 10.8 per cent and 35.2 per cent, respectively.