High crude prices to weaken refiners’ profitability in Q2, say analysts

OMCs have left retail fuel prices unchanged in the country since April 2022

State-run oil refining companies are expected to report a decline in their marketing margins in the second quarter of FY24 due to high crude oil prices, according to analysts.

Brent crude oil averaged about $87 per barrel in the July-September quarter, a gain of 11 percent from the first quarter, Motilal Oswal said. Brent crude futures traded at about $90 per barrel on October 16 on account of tighter supply in the market and geopolitical tensions with Israel and Hamas at war.

Higher oil prices translate into declining marketing margins for refiners that cannot pass on cost increases to customers because petrol and diesel prices have not been revised since April 2022.

Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, also known as oil marketing companies (OMCs), are expected to announce their second-quarter results later this month or early November.

“We expect OMC results to be operationally weaker owing to sharp fall in marketing gains of petrol and diesel due to rise in benchmark prices,” domestic brokerage Prabhudas Lilladher said in a report.

Refining margins

However, benchmark Singapore refining margins during the quarter strengthened to $9.6 per barrel from $3.8 per barrel QoQ on the back of rising diesel cracks, it said. Diesel crack is the profit generated when converting a barrel of crude oil into diesel.

The OMCs had turned profitable in recent quarters after reporting huge losses in the first half of FY23 due to soaring crude prices.

With oil prices at about $75 per barrel in the first half of FY24, OMCs had turned profitable on account of healthy marketing margins. They reported a consolidated net profit of Rs 32,147 crore in Q1. However, with crude oil soaring to almost $90 per barrel in Q2, their earnings are expected to be negatively impacted.

According to Bloomberg estimates, Indian Oil may report a consolidated net profit of Rs 7,963.10 crore, while BPCL and HPCL would report earnings of Rs 5,248.50 crore and Rs 2,990.30 crore, respectively, in the second quarter. In the year ago period, IOCL reported a consolidated net loss of Rs 910 crore, whereas BPCL and HPCL posted losses of Rs 339 crore and Rs 2,475 crore, respectively.

Experts said IOCL and BPCL are better-positioned than HPCL to withstand any further increase in crude oil prices.

“IOCL's and BPCL's larger-scale operations and a high degree of integration between their refining and marketing segments allow them to weather the impact of adverse changes in the operating environment. IOCL's presence in petrochemicals and pipelines also reflects its business diversification. Meanwhile, HPCL's smaller scale and a higher dependence on its marketing operations make it more vulnerable to any unfavourable price movements,” Moody’s said in a recent report.

An additional blow for the OMCs comes as discounts on Russian crude oil seem to be dwindling as oil prices rise. India had benefitted from the discounts on Russian oil ever since the European Union and the US imposed sanctions on Moscow after the invasion of Ukraine.

Russia became a major source of crude oil for India since its troops were sent into Ukraine in February 2022 and overtook Saudi Arabia and Iraq as India’s top crude supplier. India has been importing most of its crude oil from Russia since October 2022.

In September, Russian oil constituted 38 percent of India’s total crude oil imports.

Motilal Oswal said it expects Indian Oil’s EBITDA to be little changed QoQ, while BPCL and HPCL are likely to post a 15-20 percent decline due to shutdowns and pre-commissioning.

“Russian crude discounts, however, are likely to start shrinking, besides some increase in Middle East OSPs (official selling prices). Brent averaged at ~USD87/bbl in Q2FY24, up 11% QoQ and closing ~USD21/bbl higher at ~USD96/bbl between the ends of the two quarters, thereby resulting in sizeable refining inventory gains of USD3-6/bbl for OMCs,” the brokerage said in a report.