The share prices of Oil Marketing companies (OMCs) that have remained in a down trend since their 52-week highs in July have seen high volatility during two trading sessions this week, post Israel-Hamas conflict leading to a rise in oil prices. The share prices of Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOCL) and Bharat Petroleum Corporation (BPCL) may remain volatile in the near term looking at uncertainties pertaining to the oil prices amidst geopolitical stress caused by Israel Hamas Conflict, said analysts.
Crude price movement
Brent that was $70-75 a barrel levels in June had risen to more than $95 a barrel by the end of September. Though crude prices softened in the previous week ending 6th September, led by global slowdown concerns, however, have risen again by at least $4 a barrel amidst rising concerns on Israel Hamas conflict.
Also read- From high inflation to import bill – the domino effect of rising crude oil prices on Indian economy
How higher crude prices impact profitability of OMC’s
The Crude oil prices that had continued to rise since June led by tightening of supplies by oil producers as Saudi Arabia and Russia already had been adding to concerns on their marketing margins. Marketing margins are the margins oil marketing companies earn by selling fuel in the retail market. Since the retail prices have not changed much while input costs continued to rise due to higher crude prices, the pressure on margins was bound to be felt. The blended marketing margins had slipped deep in the red (loss of ₹5.3 a liter) for OMCs by week ending September 24th as per Nomura Research. Though some respite must have been felt by OMCs during first week of October, however the rise in crude prices now again is adding to concerns
Also Read- Petrol, diesel price hike unlikely despite crude oil price surge: Moody’s
The higher crude prices not only put pressure on marketing margins but also lead to a rise in working capital requirements since OMCs import crude oil to meet country’s petroleum products demand. As crude prices rise they need to spend more imports.
Refining Margins to provide some cushion to earnings
While marketing margins remain under pressure, refining margins however have been rising during the previous month. The benchmark Singapore refining margins (GRMs) had averaged at $4.0 a barrel in Q1FY24(from $8.2/barrel in 4QFY23) have improved now.
During the September quarter they were averaging $ 9.5 a barrel. Strong Chinese demand, low inventories of refining products, temporary ban on Russian diesel exports and large speculative positions in diesel on expectation of the US avoiding a recession had rallied refining margins in 2Q though this has moderated recently, said analysts at Jefferies India Private Ltd. This will help support profitability
What to expect from Q2 results
IOCL, BPCL and HPCL would post steep sequential decline in their earnings in Q2FY24 as concern of auto fuel under-recoveries emerge again amid high crude oil/ petroleum product price but there has been no change in the retail auto fuel prices, said Abhijeet Bora at Sharekhan. However, strong refining margins and large inventory gain (given steep rise in the Brent crude oil prices to $86.6 a barrel versus $78 a barrel in Q1FY24) would provide some relief to OMCs, added Bora.
Disclaimer: The views shared by analysts and brokerages are their own. Check with a certified financial planner before taking investment decisions.
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