Rising crude prices take toll on OMC marketing margins

Marketing margins are the margins that OMCs earn by selling fuel in the retail market. While the cost of crude oil for OMCs has risen, retail prices of auto fuels have seen little change, thus OMC margins were bound to be hit.

Brent crude prices that had been in the $70-75 a barrel range during June, however, are close to $95 a barrel, led by supply tightness. This means that OMCs that were earning significantly higher marketing margins in the last few quarters, are likely to have seen marketing margins slip into negative zone in the ongoing quarter, said analysts.

As per Nomura Research, till the week ended 24 September, OMCs were recording under-recoveries of ₹7.40 a ltr on the sale of auto fuels. Blended marketing margins had declined sharply by 80% sequentially to below normative levels of ₹2/ltr in 2QFY24-till date, as crude prices and product spreads increased, while retail product prices remained unchanged.

Based on current crude and product prices, blended marketing margins are deep in the red (loss of ₹5.30 a ltr) for OMCs, as per Nomura.

The crude prices are also not likely to fall soon. With Saudi Arabia and Russia deciding to reduce their daily crude oil production by 10 lakh barrels till December 2023, any major reduction in crude prices is unlikely in the near term as stable demand is likely to continue, said CareEdge Ratings.

The higher crude prices are likely to keep pressure on the marketing margins as the companies are unlikely to be allowed to raise fuel retail prices before the approaching state elections. In fact, analysts at Jefferies India Pvt Ltd in a recent report have said with key elections in December, the possibility of a retail price cut in diesel or gasoline (petrol) cannot be ruled out.

The OMCs have been supported by strong refining margins, shored up by the seasonally favorable demand supply scenario and some unplanned maintenance in Europe, analysts said.

The benchmark Singapore refining margins (GRMs) had averaged at $4.0 a barrel in Q1FY24 (from $8.2/barrel in 4QFY23). This improved and has seen highs of close to $12 a barrel in the July-September quarter. Though for the week ending 24 September it stood at $8.9 a barrel.

Refining margins are the margins that oil companies earn by converting crude oil into various petroleum products.

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Updated: 01 Oct 2023, 11:38 PM IST