Triple Trouble For Oil Retailers In First Quarter

India’s top three state-owned oil retailers stare at triple trouble in the upcoming earnings season.

Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. are likely to report dismal numbers in the first quarter ended June because of possible inventory losses, a weaker marketing margin and flat consumption, according to BloombergQuint’s calculations.

The first worry stems from the softening global oil demand amid the U.S.-China trade war slowing the global economy. International Energy Agency has so far pared global oil consumption growth estimates twice since May.

Crude Concern

While Brent crude—the Asian benchmark for oil—rose 8 percent quarter-on-quarter in the April-June period, it witnessed a sudden drop earlier this month on fears of a global slowdown. Oil tumbled more than 20 percent from its high of $75.6 to $59.5 a barrel in 12 days.

The sudden drop could lead to inventory losses for oil marketing companies.

Usually, a rise in crude means inventory gains as refiners that bought the existing stock at lower prices end up selling through retail outlets at higher rates. In the previous quarter, state-run oil retailers reported inventory gains as Brent crude gained nearly 27 percent from its January low to March, clocking its best quarterly gains in the last 10 years.

But the steep fall in oil prices in the last fortnight doesn’t bode well this time. And this inventory loss could offset the higher gross refining margin, or what refiners earn on every barrel of crude processed.

The Singapore gross refining margin—the Asian benchmark—averaged around $3.5 a barrel in the first quarter—10 percent higher over the previous three months due to a rise in product spreads. Yet, while the core GRMs could be higher but GRMs adjusted for inventory changes could turn out to be lower.

Election Hit

As crude prices rose, India’s recently concluded general election prevented oil retailers from earning higher marketing margins in the ongoing quarter. Fuel prices at pumps remained consistently lower despite Brent crude reaching its 2019 highs.

While retailers could not increase prices till election results were out on May 23, the decline in crude after that didn’t give them enough time to recoup losses from the earlier part of the quarter.

The gross marketing margins—the mark-up earned by retailers on the sale of every litre of fuel—dropped 67 percent for petrol and 44 percent for diesel in April-June to Rs 1.9 and Rs 3.3 a litre, respectively.

That’s expected to impact HPCL and BPCL the most as retail sales contribute nearly 60 percent and 40 percent, respectively, to their operational profit, according to the data compiled by BloombergQuint.