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The oil marketing companies (OMCs), which took a hit on margins and earnings in FY23 due to volatility in international crude oil prices, have witnessed an up tick in their marketing margins during Q1 FY24.
However, OMCs may witness a moderation in marketing margins during the July-September quarter if international crude oil prices spike following the additional production cuts announced by Saudi Arabia and expectations of a cut in retail prices of petrol and diesel due to upcoming assembly election in 2023 and Lok Sabha polls next year.
Retail prices
Motilal Oswal Financial Services in its latest report last week on OMCs, pointed out that OMCs kept retail prices unchanged since April 6 last year, despite Brent reaching a multi-year high of around $123 per barrel in June 2022. Their average marketing losses came in at ₹0.68 a litre on petrol and ₹10.1 per litre on diesel during the April-December period of FY23.
However, Brent prices has since then moderated to around $79 per barrel in Q1 FY24 QTD (quarter to date), which augurs well for OMCs as their marketing margins have improved considerably to around ₹10 per litre on petrol and ₹12.7 a litre on diesel in Q1 FY24. This should propel earnings growth in the upcoming quarter as well, it added.
“We model marketing margins of ₹3.3 per litre for petrol and diesel from Q2 FY24 onwards considering a spike in crude oil prices due to active quota management by OPEC+ or a cut in retail prices due to the upcoming State and general elections may significantly impact marketing margins and also increase earnings volatility. We also highlight that a change of $1 per barrel in crude prices impacts marketing margins by around 52 paise a litre,” the brokerage has projected.
Also read: India’s long-term OPEC+ headache
Gross refining margins
Although marketing margins have improved substantially, Singapore gross refining margins (SG GRM) has softened to around $3.8 per barrel during Q1 FY24 QTD from $8.2 in Q4 FY23 ($10.8 per barrel in FY23), Motilal Oswal said.
“While softer GRM may partially offset gains from the marketing segment in the upcoming quarter, we expect SG GRM to eventually rebound to its long-term mean of $5-7 a barrel,” it added.
Considering the recent decline in Brent prices, the brokerage has cut its crude price estimates to $84 per barrel in FY24 from $90, while maintaining its FY25 estimates at $90 a barrel as it expects supply to remain tight in FY25 owing to the recent revision in OPEC+ production targets for calendar year (CY) 2024.
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