Gross refining margins to bottom out soon before recovery, say analysts

Centre may not push OMCs to cut retail prices before elections, says Motlal Oswal

Weak gross refining margins (GRMs) that have dragged down profits of Oil Marketing Companies (OMCs) in FY25 will soon reach their lowest levels before rising again, fuelled by stronger winter months and higher availability of Russian crude, analysts said.
 
GRM is the difference between the total value of petroleum products coming out of an oil refinery and the price of the raw material, which is crude oil.
 
 In the first half of FY25, the benchmark Singapore GRM averaged only $3.6/bbl, reflecting the effects of a subdued oil demand environment. In the second quarter (April-June) of FY25 (2024-25), state-run Indian Oil Corporation Ltd (IOCL) saw its consolidated net profit fall steeply by 75 per cent to Rs 3,528 crore, while Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation Ltd’s ( HPCL's) net profit dipped by 73.2 per cent and 90 per cent, respectively.
 

"However, key product inventories globally remain at the lower to mid-range of the last five years. We anticipate limited downside for refining margins from current levels as we approach the seasonally stronger winter months," a research note by Motilal Oswal said on Thursday.
 
Elara Securities also expects better GRM in the Q2 on higher availability of Russian crude.
 
Against the backdrop of weak crude oil prices and a range-bound refining GRM environment, the outlook for marketing margins remains strong, said the research note.
 
"While OMCs appear to be trading at the higher end of the historical range, Street earnings estimates are building in only Rs 3-4 per litre marketing margin. Current margins are above Rs 10 per litre," it said.
 
Motilal note also asserted that the Centre would not push for a price cut before key state elections in Haryana and Maharashtra in 2024, and Delhi, Bihar, and Uttar Pradesh next year.
 
"We believe the risk of a substantial retail price cut for Motor spirit (petrol), high-speed diesel before the upcoming key state elections is overstated. Instead, the central government may urge individual states to reduce state taxes to provide relief to consumers," the research note said.