Cheaper oil actually hits oil PSU margins

Written by Siddhartha P Saikia | New Delhi | Updated: Oct 25 2014, 07:27am hrs
PSU oilCrude oil prices falling continuously has a negative impact for refinery margins. Reuters
Alls not well with Indias PSU oil companies despite the spate of good news that greeted them recently like the diesel price deregulation, fresh roll-out of cash transfer scheme for LPG subsidy, a big fall in global crude oil prices and forecasts of subdued oil prices in the near term. Having stocked up considerable inventories of refined products over the last 15-20 days, the three PSU companies Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are staring at the prospect of their margins coming under pressure in the short term.

Click here for graph

This is because theres usually a time lag of 30-45 days between crude oil purchases (payments) and the same being fed to the refineries. Crude oil purchased at relatively higher prices a couple of months ago, the Indian basket of crude ruled at 12% higher were used to create the present inventories but the firms can now sell them only at the current (reduced) prices, leading to a squeeze on margins.

Sources from oil companies told FE that their gross refining margin (GRM) in the September quarter is expected to be lower than that in the first quarter on the back of weak product cracks (differential between prices of crude oil and products) and mild distillate segment (see table).

Thanks primarily to the governments decision to link the price of diesel to the market, OMC stocks have gained since Friday last the share prices of HPCL, BPCL and IOC rose 5.1%, 3.35% and 0.51%, respectively, over the past week.

Crude oil prices falling continuously has a negative impact for refinery margins. This is because there is a gap of 30-45 days from procurement of crude oil to conversion into products, said a director of refineries at one of the PSU firms, who did not wish to be identified. A stable crude oil price can help in bettering GRMs, he added.

The Indian crude basket has dropped 12.3% or $11.73 a barrel to $83.61 per barrel on Thursday from $95.34 a barrel on September 30. We do not have a mechanism where prices are changed on a day-to-day basis. There would be an impact (on margins) depending on the inventories, Indian Oil Corporation chairman B Ashok told FE.

Emkay Global Financial Services estimates the second-quarter GRMs of IOC to be hover around $2 per barrel; BPCL at $3 per barrel; and HPCL at $1.80 per barrel. Sequentially, we expect weak GRMs on the back of weak product cracks in light and mid distillate segment, said a note from Emkay Global.

The benchmark Brent crude fell oil to around $86 a barrel on Friday after a confirmed case of Ebola in New York raised fears that travel restrictions could trim jet fuel demand, and poor economic growth expectations weighed on projected oil demand. Fluctuations in the global price of crude oil are expected to remain for a while. A Reuters poll released on Friday said that economists anticipate subdued growth in China and the euro zone next year, though signals from India are more positive. The gloomy outlook in two major oil-consuming markets added to fears of slowing oil demand at a time of global oversupply.