Crude shock to hit oil companies' margins, but refining gains could save Q2 show

ET Intelligence Group: A sharp rise in crude oil prices is expected to turn marketing margins on fuels to negative in September. However, gains realised during the previous two months are likely to support earnings of the oil marketing companies (OMC) for the September quarter.

Oil breached $100 a barrel this month with Brent crude at around $107 as US-Iran clashes stoked supply fears. Retail fuel marketing margins are expected to turn into a loss of ₹7.4 per litre for petrol and ₹10.3 per litre for diesel in September, according to ICICI Securities estimates. However, it is unlikely to erase improvement seen during the first two months of the quarter. The broker estimates marketing margins at ₹2.9 per litre for petrol and ₹1.3 per litre for diesel for each of the three OMCs in September quarter, compared with losses of ₹6.1 and ₹18.9 per litre, respectively, in the June quarter.

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The June quarter was particularly difficult for OMCs because higher crude prices along with freight costs weighed heavily on marketing margins. The situation improved in the September quarter. Crude prices fell sharply to around $68 a barrel in the first half of July, as West Asia tensions eased. This helped auto-fuel marketing margins recover sequentially. The full impact of the increase in auto-fuel prices announced in May is also expected to support OMC marketing margins in the September quarter.

Strong refining margins remain the key cushion against the deterioration in retail fuel margins. Singapore Gross Refining Margins (GRM) averaged $24.5 per barrel during April-August, well above the FY21-26 average of $5.6 per barrel. Rising crude oil prices compress the GRMs of OMCs because retail prices of petroleum products such as diesel and petrol do not adjust immediately. GRM is the difference between prices of crude oil and petroleum products.

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Emkay Global Financial Services expects OMC margins to improve substantially to around ₹9-14 per litre in the current quarter, compared with ₹1-3 per litre in the June quarter. Each of the three OMCs including Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation reported net losses in the June quarter amid supressed marketing margins.