Oil refineries in the country are likely to see their margins fall by over 70 per cent in the current quarter as they bought crude oil at record high prices but are now selling products at much lower rates.
The lower margins are expected to push down the profit levels of the refiners by a minimum of 15 per cent in the second quarter ending September 2008, said an official with Bharat Petroleum Corporation, which operates two refineries on its own and holds the majority stake in a third refinery in Assam. Margins of the refineries are projected to fall to around $5 per barrel during the quarter from the record highs of over $16 per barrel in the quarter ended June 2008.
“If oil prices continue to fall then we could be staring down the barrel in this quarter,” said an official with MRPL, which imports the bulk of its crude oil from Iran.
The refinery companies import crude at a monthly average price. The companies paid very high prices for the oil they booked in July as oil prices in the last month were at record highs. The oil they booked in July will, however, arrive this month, when prices of petroleum products such as diesel have crashed by over 20 per cent from the record of over $160 per barrel in July. This results in a loss for the companies.
The refiners also hold around 10 days’ stocks of petroleum products, the value of which also falls when price of crude oil and petroleum products dipping, resulting in what is called a stock loss.
“The stock loss is expected to be quite high. All the gains of the first quarter could be wiped out in this quarter,” said S V Narasimhan, Finance Director of Indian Oil Corporation (IOC), which controls around 33 per cent of the country’s refining capacity.
The high projected stock loss is, however, not resulting in lower oil imports as demand for oil products in India grows at a rate of over 10 per cent and domestic oil production is not increasing.
The crude oil refiners reported record-high margins of over $16 per barrel in the first quarter ended June 2008. This was primarily due to the companies bought oil at cheaper rates and sold products at higher prices as oil prices soared during the quarter. The high margins helped IOC report profits during the quarter and drove up the bottom lines of Mangalore Refinery and Petrochemicals (MRPL) and Chennai Petroleum Corporation (CPCL) to all-time highs.
The value of the petroleum products that the refineries hold has also fallen along with the dip in global prices. Companies like IOC and MRPL hold around 10 days’ stock of oil products.
Sliding prices of oil are a positive for the marketing divisions of the oil companies as their under-realisation from fuel sales fall.
They are, however, a negative for the refineries as they book oil at high prices but sell at products at lower prices.
“Overall a situation of lower prices are better for us, as lesser under-realisation means we have more cash in hand, even though our refining margins fall,” said IOC’s Narasimhan. IOC controls over half of the oil product retail market along with a third of the country’s refining capacity.
The oil marketing companies sell petrol, diesel, kerosene and cooking gas as prices lower than its production costs. This results in under-realisations that put pressure on the cash flow of the companies, leading to high borrowings.
