Domestic oil marketing companies (OMCs) are likely to face margin pressures in FY25 on account of a moderation in Gross Refining Margins (GRMs) due to reduction in product cracks, particularly diesel, and shrinking discounts on Russian crude oil.

According to CareEdge Ratings, after enjoying exceptionally high GRMs in FY23 at an average of $16-18 per barrel, the GRM of Indian refiners has moderated to an average of $10-12 in FY24.

The agency expects the GRM of Indian refiners to moderate further in FY25 and remain in the range of $6-8 a barrel. Marketing margin is also expected to moderate due to reduction in retail price of petrol and diesel by ₹2 a litre, effective March 15, 2024.

Margin pressures

In FY23, Indian refiners experienced an extraordinary period characterised by all-time high GRMs, which were primarily influenced by disruptions in the demand-supply dynamics triggered by outbreak of the Russia-Ukraine war.

Geopolitical factors played a significant role, leading to an increased supply of cost-effective Russian crude oil to India. Simultaneously, the cessation of natural gas supply from Russia to Europe resulted in a substantial rise in diesel cracks, further enhancing the GRMs for Indian refiners, CareEdge said.

The subsequent normalisation of diesel cracks and contraction in discount available on Russian crude led to a moderation in GRMs during FY24 to an average of $10-12 a barrel. However, the GRMs of Indian refiners consistently outperformed the benchmark Singapore GRMs, reflecting the evolving dynamics of their business operations, it added.

“While FY23 and FY24 were exceptional years for Indian refiners, FY25 is expected to witness some normalcy with moderation in refining and marketing margins. Expected refining margin of $6-8 a barrel in FY25 with full utilisation of refining capacities are still expected to be decent when compared with pre-Covid years and it provides adequate headroom to absorb any potential shocks in marketing margin during the year,” CareEdge Ratings Director Hardik Shah explained.

The Russia-Ukraine conflict pulled up crude oil prices to record levels in H1 FY23. Elevated crude oil prices could not be passed on to Indian customers due to stagnant retail prices resulting in loss from marketing operations of OMCs.

Marketing margin started improving from Q3 FY23 onwards with a reduction in crude prices and stable retail prices of petrol and diesel. However, with the surge in crude prices in the latter part of Q2 FY24 which closed at $96 a barrel at the quarter end and retail prices being unaltered, the marketing margin witnessed a moderation.

Despite this, the overall marketing margin for FY24 witnessed a substantial jump over FY23 aided by relatively lower crude prices and stable retail prices.

Significantly higher marketing profit offset the reduction in GRM in FY24.

Marketing margin is expected to moderate substantially in Q1 FY25 with the recent price cut for petrol and diesel, the agency said.

The crude prices are also on an increasing trend since the start of calendar year 2024 barring some reduction in between. Crude prices are expected to have an upward bias in the near term on the back of the strained situation between Israel and Iran. Accordingly, the marketing margin of OMCs is expected to remain under pressure in FY25, it added.

Russian supply

CareEdge pointed out that the share of Russian crude in India’s total crude oil imports reached a nine-month high level of 40 per cent in April 2024.

Despite the shrinking Ural-Brent differential over the last few months and fresh sanctions imposed by the US, the share of Russian crude oil import increased as offtake from China remained subdued and Russian refining infrastructure is partially impaired by Ukraine drone attacks, thereby making higher crude oil volumes available for India’s refiners, it added.

“Going forward, the share of Russian crude oil in India’s total imports is expected to remain sizeable at more than 30 per cent as long as arbitrage is available for Indian refiners,” it said.