It is a story of changing fortunes for oil producers and refining companies. After a stupendous rally over the last six months, global crude prices have seen significant correction in the last few weeks. From the peak level of $124-levels, the price of Brent crude has corrected by over 20 per cent to $99-levels. With the global recessionary fears weighing on the demand outlook, the crude prices are expected to soften further. Indian upstream (crude oil producers) and downstream (refiners) may face a double whammy, with falling crude on the one end risking their margins and the newly-imposed windfall tax (on crude, petrol, diesel and aviation fuel) potentially eroding a good chunk of their margins.
Oil producers woe
For crude oil producers, Oil India and ONGC, the impact is straight forward, given that Brent crude price has corrected by about 20 per cent now, from its peak in early-June 2022. The recent announcement by the government imposing windfall tax of $40/barrel on domestic producers will lead to significant erosion of margins. With Brent crude currently trading at $98-levels, the realisation for ONGC and Oil India will be lower than $50 per barrel, given that they will have to cough up another 20 per cent cess to Oil India Development board.
For refiners, the problems are many. For one, falling crude prices will result in inventory losses as they will be holding high-priced crude inventory. Second, the proxy for Indian refiners’ gross refining margins (GRM) - Singapore GRM has corrected by about 50 per cent from its peak of about $24 per barrel to $12-per-barrel levels now, thanks to the falling crude and the international prices of its downstream products such as petrol, diesel and aviation fuel. Third, in addition to lower refining margins, refineries will have to take a hit on the marketing margins as well. This is because the retail price of petrol and diesel have not kept pace with the increases in crude prices, resulting in higher marketing margin losses for the three State-owned refiners — Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL), accounting to over 90 per cent of retail sales of automotive fuel. For instance, the price of petrol in Delhi has remained unchanged since May third week at ₹97-levels a litre, even as the crude prices peaked at $125-per-barrel in early-June, before settling at under $100 a barrel.
With Q1FY23 results round the corner, ONGC and Oil India are expected to post healthy growth, given that oil prices were ruling high during most part of the quarter (upwards of $100 per barrel), higher than the same period last year (which was about $75 per barrel).
However, for refining companies, despite record-high GRMs (almost 100 per cent higher than the average $10-12 per barrel), the marketing losses due to retail prices remaining unchanged for petrol and diesel will possibly wipe off the gains from higher GRMs. However, on a low base of Q1FY22, they may still see margin growth in the April-June 2022 quarter.
For Reliance Industries, the largest refiner in the private sector, accounting for over 27 per cent of the country’s total refining capacity, this quarter is expected to be a strong one. The company’s minimal presence in the fuel marketing space, coupled with diversification into telecom and retail, which are doing well, are expected to bode well for RIL’s Q1FY23 performance.
However, whether it is the oil producers or the refiners, the benefits of higher prices and refining margins are now in the rear-view mirror. Their outlook for the current quarter will be impacted by the recent decline in crude price and impact of windfall tax.
The only hope for the sector remains to be the expectation of revision in the windfall tax . Given that it will be two weeks since the maiden announcement of the windfall tax, and government’s promise to review the scheme every fortnight, review and some modification of the current scheme over the next few days cannot be ruled out.