Energy: Yet another month of soft demand, refining remains a challenge for OMCs

By: |
New Delhi | Updated: June 25, 2019 12:50:54 AM

Refining remains a challenge for OMCs; ONGC, PLNG and GAIL offer best prospects

energy, oil sector, ptrolium sector, petrolium industry, india economyIndia’s oil demand in May rose just 59kbpd (flat y-o-y in tonnage).

India’s oil demand was flattish in May after revisions showed that it actually fell in April. Indeed, demand has slowed sharply in recent months despite a benign base, with petrol the only bright spot for now. Even so, margins matter more for the OMCs where marketing has rebounded smartly even as refining remains challenging with rising capex and subsidy dues also weighing on cashflow. We prefer the cheaper ONGC & Oil India instead, therefore, as also Gail & PLNG.

Demand: India’s oil demand in May rose just 59kbpd (flat y-o-y in tonnage). In turn, this has left 2019 demand averaging just 137kbpd with Jun/Jul, when a stiff base awaits, likely to be modest too, esp. if the elections were providing an uplift.

Margins: Industrial fuel margins remain sluggish, but auto fuel margins have recovered sharply, post the elections, to nearly twice normal levels helped also by the 15% fall in crude prices in the last three weeks.

Subsidy: Indeed, softer crude prices also imply a more benign LPG/SKO under-recovery for the year despite a relatively stiff `90 bn in Q1FY20, although cashflow issues could persist. Subsidy dues to the OMCs had risen past `330 bn by Mar’19, e.g., leaving debt $5 bn higher q-o-q. This has since come off by 25% but with the govt. fiscal accounts in disarray, the pressure could build again in 2HFY20.

Refining: It is refining, though, that is a larger challenge with margins softening again after the rebound from nine-year lows in March/April. Gasoline is soft, naphtha has weakened and diesel is sluggish with narrower LH spreads and rising Saudi OSP premiums also headwinds.

Outlook: FY20 may be a soft year for OMCs, therefore, especially if the IMO uplift proves illusory with cashflow also under strain from subsidy dues and rising capital spends. In particular, HPCL appears most extended by its refinery expansions.

For latest coverage on Maharashtra Assembly Election 2019 and Haryana Assembly Election 2019, log on to We bring you full coverage of Assembly Election 2019 on Financial Express, stay tuned for latest election updates.

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.