Crude prices dip, but OMCs unlikely to cut fuel prices amid weak profitability and LPG losses

Weak global oil demand and the possibility of an oversupply in the market as several countries ramp up production have weighed on crude oil prices.

State-run oil marketing companies (OMCs) are expected to keep retail petrol and diesel prices unchanged, despite crude oil prices largely trading below $80 per barrel since August 2024, due to weak profitability from lower gross refining margins (GRMs) and losses on LPG cylinder sales.

Energy experts told Moneycontrol that the OMCs are unlikely to cut fuel prices as their profitability has dipped in the current fiscal so far compared to last year. The state-run OMCs, which include Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), had last cut petrol and diesel prices by Rs 2 per litre in March 2024.

“The price cut is unlikely given the GRMs have dipped significantly from last year. Secondly, the OMCs are making huge losses on the sale of liquefied petroleum gas (LPG) for which the companies are not getting compensation from the government. The marketing side is supporting the profitability but the other two factors have a big impact on the companies,” said Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA.

“Additionally, discounts from Russia have also come down from double digits to single digits currently,” Vasisht added.

IOCL booked under-recovery of Rs 8,870.11 crore for the first six months of FY25 on the sale of cooking gas cylinders as the retail selling price was less than market-determined price. The companies have booked under-recovery on LPG amid high global prices of the fuel as the country is dependent on LPG imports for the majority of domestic consumption.

Crude prices sliding

Meanwhile, weak global oil demand, primarily from China, and the possibility of an oversupply in the market as several countries ramp up production have weighed on prices with crude oil hovering around $75 per barrel currently. The benchmark Brent crude slid to $69 on September 10, the lowest in three years on demand worries, compared to prices breaching $90 per barrel in April 2024 due to the geopolitical crisis in the Middle East.

“There is no case for fuel price cut. The first reason is the OMCs are still bearing the under-recovery on behalf of the sale of LPG. Secondly, some amount of domestic gas has been deallocated from the CGD sector (city gas distribution), which opens up the possibility of CNG getting expensive. If petrol and diesel prices are cut, then that can impact the conversion of vehicles,” said Nitin Tiwari, Vice President, PhillipCapital.

“The profitability of OMCs is currently weaker from last year given lower refining margins and losses on LPG,” Tiwari added.

OMCs’ performance

The state-run OMCs reported lacklustre results in the second quarter of 2024-25 (FY25) primarily on account of weak refining margins and lower product cracks. The three companies also booked huge under-recovery on the sale of LPG cylinders in the quarter.

A product crack is the difference between the prices of one barrel of crude oil and one barrel of a specified product. A lower crack implies that refineries are making less money processing crude oil to produce refined products.

The combined net profit of the three OMCs was significantly lower in Q2FY25 over the year-ago period. On a standalone basis, their combined net profit was 88 percent lower at Rs 3,208 crore in the quarter ended September 30, 2024, compared with Rs 26,586 crore in the same period in the previous year.

According to a Fitch Ratings report released on January 3, the refinery margins of OMCs are expected to fall below their mid-cycle levels in FY25 amid lower product cracks, regional oversupply, and lower benefits from price differences between crude varieties.

However, marketing margins would be healthy on lower Brent crude oil prices than FY24. “This will mitigate the pressures from lower refining margins for the OMCs, although pure refiners like HPCL-Mittal Energy Ltd (HMEL, BB+/Stable) will face greater pressure on profitability. We expect refining margins to recover to their mid-cycle levels in FY26, as the regional oversupply eases and Brent crude oil prices fall in line with Fitch’s assumption, while we project marketing margins to remain supportive. HMEL’s low rating headroom in FY25 will improve in FY26 due to a gradual normalisation in refining margins,” the report said.