The fall in crude oil prices towards the end of 2014 may result in third quarter inventory losses of up to ₹16,000 crore for the Indian oil sector and allied industries, according to ratings agency Crisil.

Between September and December, global crude oil prices fell by a third, closing out 2014 at $55 a barrel. Down the oil chain, prices of petroleum derivative products – such as polymers and chemicals – also fell by around 30 per cent.

Inventory loss This occurs when refiners, traders and manufacturers of final petroleum products make raw material purchases at higher prices but have to sell their final products at lower prices because of a subsequent fall in the cost of crude oil. Reliance Industries posted its first drop in net profit (down 4.5 per cent year-on-year) in nine quarters in the October-December period, solely because its refining margins nosedived during the global slump in crude oil.

Alok Agrawal, Chief Financial Officer of Reliance Industries, while presenting the third quarter results, had said, “Our revenue for the quarter is down by 20 per cent. (This is because) most of the company’s products in refining, petrochemical, exploration and production closely track crude prices... In the commodities business, this kind of volatility puts a lot of challenges.”

Crisil’s estimate of the ₹16,000-crore inventory loss is based on the analysis of about 250 companies rated by the agency, including refiners, traders, polymer processors, and bulk and specialty chemical manufacturers. “These companies,” the report said, “have average total inventory holding of about 45 days; it typically ranges between 30 and 60 days, depending on the location of plant, processing time, and price outlook.”

Offesetting losses For oil marketing companies, the report expects losses to be partly offset by higher profit margins from retail sales of petrol and diesel after deregulation of prices. The third-quarter fortunes of traders and processors of crude oil, polymers and chemicals will, however, depend on their product profiles, hedging policies, extent of inventory build-up and the strength of their balance sheets.

“These companies have begun to actively reduce inventories to minimise the pain of the sharp fall in crude oil prices,” the report said. Private and public sector oil refiners and marketing companies declined to comment on the report.

Most of them are lined up to release their December quarter results this week. Analysts, however, believe that such large-scale losses will be short-lived.

Atul Kumar, Head – Equity Funds, Quantum AMC, said, “The volatility in crude oil prices is part of the business and over the long-term, crude will normalise.”

Alex Mathews, Head – Research, Geojit BNP Paribas Financial Services, believes the stocks of refiners and oil marketing companies have already corrected. “Losses due to falling crude have already been discounted into stock prices. Besides, inventory losses are one-time event. The downside in the coming quarters is limited.”

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