Firm refining prospects add to confidence on OMC outlook

The reported refining margins for oil marketing companies are expected to have got a further boost from rising contributions of lower priced Russian oil, said analysts. Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd’s (PCL) GRMs ranging at $14.1-20.6 a barrel was better than expectations.

The Benchmark GRMs, however, had dropped to $3.8 a barrel during the ongoing quarter (Q1), a significant decline from the average of $8.2 a barrel during Q4. The rising covid cases in China, global recession concerns had weighed and led to this decline, said analysts. The positive, nevertheless, is that the benchmark GRMs have started to rebound again.

Reuters Singapore refining margins increased 23% week-on-week to $5.1 a barrel in the week ended 21 May, from $4.2 a barrel in the previous week, suggested Nomura Research data. Analysts at Nomura attributed the rebound to an increase in spreads across products except for naphtha and LPG (liquified petroleum gas). Sharp decline in Singapore complex refining margin in Q1 of FY24 to $3.8 a barrel from $8.2 a barrel in Q4 FY23 was impacted by lower spreads across all products, except fuel-oil, Nomura analysts said.

The analysts have been expecting a rebound. Jefferies India analysts in a 22 May report had said recent weakness in refining margins seemed transitory as Russian diesel exports were unexpectedly elevated despite European Union ban. However, with signs of Chinese demand recovering, diesel inventories in US and Asia at multi-year lows and US gasoline demand expected to rise to peak summer driving season, refining margins should strengthen.

Although super-normal margins seen in Q4FY23 by OMCs may moderate, the refining margins will remain healthy and better than single digit averages seen earlier.

“We expect GRM of OMCs to sustain at a higher level on the back of Russian discounted oil share in crude basket inching up and the recent recovery in diesel/gasoline cracks while the global refining capacity addition delay will further support the GRMs" said Yogesh Patil, senior analyst at Dolat Capital.

Diesel demand, along with ATF (aviation turbine fuel), remains strong due to continued geopolitical uncertainty and is likely to support the healthy refining margin outlook, said Avishek Dutta, senior analyst, Prabhudas Lilladher Pvt. Ltd.

The marketing margins also remain strong for OMCs and lower crude prices are also adding to this outlook, too. The blended marketing margins increased further to ₹12.5 per litres in the week ended 21 May, from ₹12.2 a litre in the previous week, as per Nomura data. These remained sharply above the normative levels of ₹3 a litre. In Q1FY24, the blended margins have increased 2.8 times sequentially to ₹8.8 per litre, from ₹3.2 a litre in Q4FY23 and ₹12.7 a litre in Q1FY23, as product spreads have declined sharply, while retail product prices remained unchanged, as per Nomura analysts. Based on current crude and product prices, blended marketing margins are significantly above normative levels at ₹10.3/litre.

If crude sustains at the current level, in FY24, OMCs marketing segment is expected to post EBITDA growth year-on-year and in case of correction in crude prices, OMCs are unlikely to pass on the benefits to the consumer in the near term, said Patil. However, the possibility of price cuts cannot be ruled out in second half of FY24 looking at general election in 3 major states, added Patil.