Higher crude prices likely to impact OMCs’ refining, marketing margins 

By: |
Published: January 7, 2020 4:05:34 AM

Crude prices have risen by $3 per barrel since the US airstrikes on Friday. On Monday, Brent crude touched $70.74/barrel. Industry experts said since touching a low of $56/bbl in August 2019, crude has risen by 25% to $70/bbl as on January 6.

Higher crude price, OMC, refining, marketing, crude oil price, crude oil, industry newsExcess supplies of crude balanced the volatility in prices in the last couple of years since the US and Russia have become net exporters of crude oil. (Reuters photo)

Refining margins of Indian oil marketing companies may get further impacted in coming weeks if crude oil prices consistently remain high following Iran’s threat to avenge the US action against its military commander.

The current crisis has the potential to put the brakes on global demand growth that would impact the crack spreads which are already affected by the collapse of Singapore GRM to 69-quarter low of $1.67/barrel. Petrol and diesel cracks declined to 6-month low of $10.0-13.3/bbl in December and are being viewed as a big concern.

Crude prices have risen by $3 per barrel since the US airstrikes on Friday. On Monday, Brent crude touched $70.74/barrel. Industry experts said since touching a low of $56/bbl in August 2019, crude has risen by 25% to $70/bbl as on January 6.

K Ravichandran, senior vice-president and group head, corporate ratings, Icra, said a significant increase in crude oil prices has the potential to slow down global demand growth which could also adversely impact global crack spreads, and thus gross refining margins of the domestic refineries over the medium term. “With dearer crude and rupee depreciation against dollar, the oil marketing companies could face pressure on marketing margins. Further, if PSU OMCs are directed to share a part of higher GURs, it could be a key negative for their profitability.”

R Ramachandran, director refineries of BPCL, told FE there might not be any impact if the crude stays at the current level. However, the real impact will happen if the crude coming from Basra and other sources is protected by the US and other interest holders get affected. “If there is any action by Iran against the US and the crude supply gets affected, we will have to look at the US, Russian or the Mediterranean supplies. As of now, we have already placed our orders for January and February, and have created new sources. So, we have to just adjust volumes from the new sources in case of any trouble.”

Excess supplies of crude balanced the volatility in prices in the last couple of years since the US and Russia have become net exporters of crude oil. It is believed to be one of the reasons behind prices remaining suppressed and having moved only $3/bbl despite the US-Iran crisis.

Gaurav Moda, energy lead at Accenture, said excess supplies from the US, Russia, etc have counter-balanced the sharp volatility in prices. “Even if we assume worse case scenario of a full-scale war, countries such as the US and Russia will try and balance the supply gap. Besides, shale gas players become profitable after $55-$60/bbl, so producers will open their taps, balancing the volatility in price.”

“It is a question of how the 3 OMCs manage their stocks. They also manage up to 3 months of stocks each, which takes care of the vagaries and volatility on a daily basis. So, at the end of the day, we look at a weighted average prices, which ease out sharp spikes. At best, the consumer faces moderated volatility in prices,” Moda said.

Sumit Pokharna, vice-president and an oil sector analyst at Kotak Securities, said, “Every $10/bbl increase in crude price increases the current account deficit to the GDP by 51.4 basis points, and is also credit negative for the country.”

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Amazon Fire TV crosses 40 million active users globally
2Online transaction without OTP? Flipkart launches ‘Visa Safe Click’ for frictionless checkout; check details
3Syndicate Bank surpasses Rs 5 lakh crore business mark