A Trifecta Of Problems Face Oil Marketers In Fourth Quarter

Benchmark Brent crude on average tumbled 18 percent in the fourth quarter, according to data compiled by BloomergQuint, after Russia baulked at Saudi Arabia-led OPEC’s plan for deeper output cuts to cope with falling demand amid the novel coronavirus outbreak, triggering an all-out price war.

If the market price falls, refiners who bought the existing stock at a higher rate end up selling it cheaper and vice-versa. Brent crude averaged lower at $51.1 a barrel in the quarter ended March. This may lead to an inventory loss for the three listed oil retailers —Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.

Lower demand for oil also caused the Singapore gross refining margin to fall to its lowest in at least eight years at $1.2 per barrel. That came as margins of petrol and jet fuel, accounting for 51 percent in the Asian benchmark’s composition, declined amid shutdowns across the globe to combat the Covid-19 pandemic.

While petrol and jet fuel form only 23-25 percent of Indian refiners’ product slate, a fall in margin of other products and inventory losses would weigh on refining margin of domestic oil marketers. And lower gross refining margin usually means that refiners would earn less for converting every barrel of crude oil into fuel.

Owing to these factors, shares of the listed OMCs tumbled. Indian Oil’s stock slumped 35 percent in the fourth quarter, the most since March 2008, Bloomberg data showed. While BPCL’s 35.5-percent drop was the most since June 2008, HPCL’s 28 percent decline was the biggest since December 2011.

The fall in shares, in turn, made their valuations cheaper. According to Credit Suisse, Indian Oil and HPCL are trading at historical low valuation multiples, while that of BPCL is still higher than peers as it’s still factoring some upside from a potential divestment of Indian government’s stake.

Impact On Retail Fuel

Prices of petrol and diesel fell lower than global crude oil in the quarter ended March as the government increased excise duty and the oil marketers earned a higher mark-up on every litre of fuel sold.

On average, gross marketing margins earned on sale of every litre of petrol and diesel stood at Rs 3.5 and Rs 3.9 a litre, respectively, during the quarter.

While that’s expected to benefit HPCL and BPCL more as retail sale of fuel contributes nearly 60 percent and 40 percent, respectively, to their operational profit, the gains will be offset by a likely fall in fuel consumption amid a nationwide lockdown.

The domestic fuel consumption is expected to drop drastically in March. Petrol, diesel and jet fuel consumption, according to a PTI report on April 6, fell in the range of 15.5 percent, 24 percent and 31 percent, respectively, during the month.