The Hindu Business Line : Volatility in crude may hit IOC refining margins

Kolkata, Feb. 25Having recorded a reasonably high refining margin throughout the year, IndianOil is expecting a drop in gross refining margin (GRM) in the fourth quarter due to sudden volatilities in crude and product prices. The company, however, hopes to post a GRM of close to $9 a barrel for the entire fiscal.

According to sources, having posted over $10 a barrel of GRM in the third quarter, refining margins slipped to $7-8 in January and further dropped to $3-$4 in February. While the trends in crude and product prices point that margins may improve in March, conservative estimates suggest that the average margin for the current quarter may be 20-30 per cent lower than that of the third quarter ended December 2007.

Loss minimised

Refining margin was the single largest contributor towards the company’s net profit in the first nine months of 2007-08.

More importantly, it had minimised the impact of record marketing losses, which could have led to severe cash crunch.

The weakness in refining margin comes at a time when liquidity is strained due to record high crude prices and a marketing loss of Rs 155 crore a day (net of increase in retail prices by Rs 2 a litre for petrol and Re 1 a litre for diesel).

To add to IOC’s concern, the rupee is finally showing some signs of depreciation against the dollar.

If the weakness continues, the company’s exchange gain will come down in the fourth quarter compared to the third quarter.

Seeks more sops

While the drop in refining margin, marketing loss and anticipated drop in exchange gain all point to a drop in profitability during the fourth quarter, the company is waiting for the Government to come out with the promised sops in the Budget proposals.

The Centre had previously indicated that it might offer higher subsidies to the refining and marketing companies by increasing the share of oil bonds from 42.7 per cent of the total.

“If the share of oil bonds go up as expected, we will be able to tide over the crisis successfully in the fourth quarter,” an official said.

More oil bonds

Meanwhile, the company plans to sell Rs 1,000-1,500 crore worth of oil bonds during this quarter to tide over the cash crunch.

This is over and above the Rs 1,500 crore bonds sold last week, taking the total sale during the year to approximately over Rs 8,000 crore.

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