Crude shock to hit oil companies' margins, but refining gains could save Q2 show

A sharp rally in global crude oil prices, with Brent futures climbing 11% to approximately $95 per barrel, has erased the marketing profitability for India’s state-owned oil marketing companies (OMCs). Combined with a depreciating rupee, which has weakened to 83.1 against the U.S. dollar, the rising cost of imported oil is directly impacting the financials of firms like Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL).

Marketing Margins Turn Negative

The core business of selling fuel has become a loss-making enterprise for these companies amid stable retail prices. Current estimates place marketing margins in negative territory, with losses of around Rs 0.8 per litre on petrol and a more substantial Rs 4.5 per litre on diesel. This marks a significant reversal from the first quarter of fiscal year 2024, when lower crude prices allowed OMCs to book healthy profits on fuel sales.

Refining Segment Provides a Cushion

Despite the pressure on the marketing front, the companies' refining operations are providing a crucial financial buffer. Gross Refining Margins (GRMs), the profit made from converting crude oil into finished products, have remained robust. The Singapore GRM benchmark stands at a healthy $9 per barrel, supported by strong global demand and refinery maintenance cycles in Europe and the United States. This strength in the refining segment is expected to partially offset the losses incurred from fuel retailing.

Q2 Earnings Outlook

The opposing trends in marketing and refining are set to define the second-quarter financial results. While earnings will undoubtedly be lower than the record profits seen in the first quarter, the solid refining performance is expected to prevent a return to the heavy losses experienced in the previous fiscal year. Analysts project a combined EBITDA for the three OMCs to be around Rs 20,100 crore for Q2, a sharp drop from Q1's Rs 38,500 crore but a significant improvement over FY23's performance. Investor sentiment has reflected this pressure, with shares of the OMCs falling between 2% and 5% over the past month.

Future Outlook

The profitability of India's oil retailers in the coming months hinges on the trajectory of global crude prices. If international oil prices remain elevated or continue to rise, the strain on marketing margins will intensify, potentially forcing a decision on retail price adjustments or government intervention through tax cuts to absorb the shock.