InvestorQ : Is it true that the oil marketing companies could take a hit on profits in the June 2022 quarter?
sarah Leo made post

Is it true that the oil marketing companies could take a hit on profits in the June 2022 quarter?

Archita Jajjoo answered.
2 months ago

That is correct and major brokers like Kotak have pointed out the same in their research reports. The news is not great for oil marketing companies (OMCs) like Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL). These downstream companies have a refining franchise and also an oil marketing franchise. These OMCs face the real brunt of higher crude prices, since these OMCs did not raise retail prices in tandem with the crude prices, being politically sensitive.

According to estimates by some brokers the estimated loss to these OMCs could be in the region of Rs10 to Rs12 per litre of petrol and diesel. Remember, these downstream OMCs also have a strong refining business which has gained from Gross Refining Margins (GRMs) at record levels of $22-24/bbl. The real impact would be the net impact i.e. the loss on marketing as offset by the gains on refining. However, the net impact is still likely to reduce the operating margins of the OMCs by 75 to 100 basis points.

The losses are on account of the retail prices remaining static at the pumps. This short realization of about Rs12 per litre in the June quarter is sharply higher than the loss of around Rs1.60 per litre suffered by the OMCs in the March 202 quarter. Of course, the gross refining margins (GRMs) are at a life-time high of $22-24/bbl and that is largely because the price of refined fuels has risen faster than the price of crude oil. However, question is whether higher GRMs can really maintain or would it will see mean reversion.

The good news is that the GRMs may be elevated for quite some time and there are a number of reasons for the same. For example, low fuel inventories and a shortfall of Russian oil supply in the EU region will most likely keep GRMs at elevated levels. While the refinery production in Europe is falling, China is gradually relaxing restrictions. Thus demand for refined oil could far outpace the supply of refined oil. That is likely to support fairly high levels of gross refining margins and so the marketing offset is surely available.