European crude oil benchmark Brent sank to a low of around $69 per barrel (bbl) on September 10, a drop of nearly $22/bbl from $91/bbl early April, as China’s economy sputtered. Prices have since climbed by around $2/bbl.
But don’t expect that volatility or differential to translate into something substantial at the pump when you next go to fill your Activa or Innova. This is because Indian oil marketing companies (OMCs) may find it difficult to transfer the gains originating from lower crude oil prices to consumers at the pump — barring a nudge from New Delhi during state polls — since cracks, or profits from processing crude into petrol and diesel, have sunk to multi-year lows, industry sources and officials said.
Plunging cracks may wipe off much of the supernormal profits that OMCs generate from retailing fuels, industry sources said, blunting demands for cuts in fuel rates. Indian Oil, Bharat Petroleum and Hindustan Petroleum are making five-to-six times margins now on selling petrol and diesel compared to pre-pandemic averages after oil prices crashed, according to calculations based on data provided by analysts and oil company officials.
Pure economics does not warrant a price cut, especially since they don’t have the pricing power, refining officials said. They cannot talk about political compulsions, they added.
Gasoline cracks are at near zero, oil secretary Pankaj Jain told reporters on the sidelines of an industry event earlier this month. He declined to discuss diesel cracks, India’s biggest consumed product. Diesel makes up 41 per cent of petroleum products output while gasoline accounts for only 16 per cent, according to oil ministry data. Within these two, they control most of the gross refining margins (GRMs), or profitability, of a refinery, said Prashant Vasisht, senior vice president and co-group head, Corporate Ratings.
Diesel cracks are now fetching about $10/bbl for state oil companies, a third of 2022 levels, but that is insufficient to cover a paltry $4/bbl margin derived from processing crude to gasoline, said a senior official from a state refiner. “We would need $18-20/bbl diesel cracks to cover for lower profits from gasoline,” he added.
A timeline for a rebound in cracks is hard to predict due to weak Chinese demand and the elusive recovery in the US and Europe, said Swarnendu Bhushan, co-head of institutional equities, PL Capital-Prabhudas Lilladher.
With reduction in crude prices, diesel cracks may climb to around $15/bbl whereas gasoline cracks are expected at around $6/bbl, said Hardik Shah, director at CareEdge Ratings. Cracks have declined amid weak export demand due to economic slowdown in major export markets and higher output, he added.
Several new refineries have been starting up in West Asia and Africa, leading to lower crack spreads overall, Vasisht said.
Refining margins
Petrol and diesel cracks soared to average $13/bbl and $31/bbl, respectively, in calendar 2022, after the Ukraine conflict disrupted product flows, before declining to around 11/bbl and $21/bbl in 2023. Prior to the pandemic, diesel cracks averaged around $15/bbl while petrol cracks averaged around $10/bbl on a historical basis, industry data shows.
Low cracks have contributed to abysmal refining margins, prompting a rethink on lowering pump prices. GRMs have declined from over $3/bbl in the first quarter of the current financial year (Q1FY25) to around $2/bbl in Q2YTD (year to date). Additionally, inventory losses are expected to impact refiners in Q2FY25, Bhushan said. For instance, a year ago, in Q1FY24, Numaligarh Refinery Limited (NRL), a standalone refinery, posted $46/bbl in GRM while Bharat Petroleum earned $12.6/bbl during the same period.
“We see GRMs are reverting to their FY18-FY19 levels now, given that the industry is now over with external shocks in the form of geopolitical events and (there’s) post-Covid demand rush,” said Paras Pal, senior analyst, India Ratings & Research.
If one (GRM) gets to $2.5-3/bbl, it just about meets refining costs, Vasisht said.
OMCs plan to balance plunging profits from refining by purchases of discounted Russian crude, and deriving hefty marketing margins from sale of petrol and diesel at retail outlets. Savings on Russian oil yield around $5 per barrel for refiners, two state-run refining officials said. ICRA estimates that a marketing gain of Rs 1/litre on petrol and diesel would compensate for the GRM loss of $0.9/bbl.
Retail profits
Retail outlets are generating supernormal profits for OMCs. It was typical of OMCs to make Rs 2.50-3/litre as marketing margin a few years back when they adjusted pump prices to correspond with global product prices, a state-run refining official said. That number has shot up to Rs 15/litre for petrol and Rs 12/litre for diesel vis-à-vis international product prices in September 2024, ICRA estimates. Bhushan expects marketing margins on petrol and diesel at upwards of Rs10/litre, which should be sufficient to offset the decline in GRMs.
Pal estimates OMCs are earning Rs 14-15/litre of gross profit on petrol and Rs 13-14/litre of gross profit on diesel. On the other hand, crack spreads on petrol is at $4.5/bbl, less than half of historical averages. Global oil prices are used as a benchmark because India imports around 88% of its crude to convert into diesel, petrol and LPG, among others.
Oil secretary Jain said that marketing margins only help companies operating retail outlets. But independent refiners like Chennai Petroleum, Mangalore Refining & Petrochemicals and NRL will suffer from poor cracks and refining margins. The profitability for standalone refiners would take a hit with the declining GRMs, ICRA’s Girish Kumar Kadam said.
Kadam, however, sees a headroom for downward revision of petrol and diesel prices by Rs 2-3/litre, if crude prices remain stable.