As retail prices of petroleum products are mapped with international rates, the steep fall of global crude prices in Q4FY20 meant that by the time refiners sold their products after processing crude, retail rates had fallen.
India’s three state-run oil marketing companies (OMCs) — IOCL, HPCL and BPCL — could among themselves report massive inventory — crude and products — losses of around Rs 33,000 crore in Q4FY20 because of a precipitous fall in crude prices through the quarter, according to analysts.
Somewhat strong gross refining margins before the lockdown that stunted demand helped these firms in the quarter to salvage the situation a bit, yet they could all be in the red in the quarter. Also, one of the analysts said these firms might see a plunge in gross refining margins (GRMs) in the April-June period (Q1FY21) because of the demand destruction.
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The OMCs had reported crude inventory gains for the third quarter of the current fiscal — Rs 1,608 crore by IOC and Rs 343 crore by HPCL and Rs 100 crore by BPCL. Currently, most refineries in the country, including the private sector ones, are operating at nearly half their respective capacities. “The sustenance of the refinery-runs is dependent on the materialisation of the demands as we move forward in the lockdown period.
There are limitations on the throughput at which each plant in a refinery can operate. Capacities below this level will require units to stop, R Ramachandran, director refineries at BPCL, told FE recently. While the OMCs’ gross refining margins in Q4FY20 have been aided by gains from refinery transfer price (RTP) being higher than spot prices, these gains will be more than nullified by the large inventory losses in the quarter. Vidyadhar Ginde, of ICICI Securities, wrote, “Oil price fall in Q4FY20 is estimated to have led to inventory loss of Rs 331bn for OMCs. It would mean all three OMCs would be in the red in Q4FY20 despite strong auto fuel marketing margins.”
According to ICICI Securities, the three OMCs’ crude inventory losses in Q4FY20 could be Rs 18,590 crore while there would be another Rs 14,500 crore losses for them in terms of products inventories. India has a total refining capacity of 250 million tonne per annum and refiners keep an inventory of 20-50 days of crude on average to avoid disruption in operations.
Crisil Ratings wrote: “For oil refiners, the Covid-19 pandemic is delivering two blows: Inventory loss of over Rs 25,000 crore in the January-March quarter because of a 70% fall in crude oil prices, and a likely plunge in GRMs in the first quarter of fiscal 2021 because of demand destruction.” These are just crude inventory losses and includes those of private refiners, sources said.
Among the OMCs, the Q4 crude inventory losses are estimated to be the highest for IOCL (Rs 12,000 crore), followed by Rs 4,250 crore for BPCL and Rs 2,340 crore for HPCL. “Inventory losses would be more for refineries located away from the coast because they have to stock crude oil for longer periods,” Sachin Gupta, senior director, Crisil Ratings, said. Major inland refineries in the country are owned by IOCL, including its Mathura, Panipat and Bongaigaon plants.
As retail prices of petroleum products are mapped with international rates, the steep fall of global crude prices in Q4FY20 meant that by the time refiners sold their products after processing crude, retail rates had fallen. Diesel prices in Delhi dropped 8.3% to Rs 62.29/litre on March 31 from January 1. Of this, only Rs 31.5/litre is earned by OMCs, and the remaining goes towards central government duties, state VAT and dealer commission. The current price also includes the additional cess of Rs 3/litre imposed by the Union government on March 14.
“Crude prices nosedived from an average $55 per barrel in February to $33 in March and closed at around $20 end of March as demand slumped because of the pandemic. On April 12, 2020, OPEC+ managed to strike a deal for a record production cut of 9.7 million barrel per day. Yet crude prices have hovered low because of the pandemic-induced plunge in demand across the globe”, Crisil Ratings wrote.