After long period of volatility in crude oil prices that resulted in state-run oil marketing companies reporting weak earnings in the first quarter of the current financial year, a new declining trend in the prices, if sustained, is expected to result in healthy marketing margins for the downstream companies going forward.
Analysts also expect the prices of diesel and petrol to fall at the retail end considering the prices remain in the range.
“Given the nature of our oil industry, it is likely that marketing margins (of OMCs) will be healthier, while refining margins may be under pressure,” said Ashwin Jacob, partner at Deloitte India.
The country’s three major OMCs – Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp, registered a weak first quarter in FY25 owing to lower refining margins. Furthermore, the reduction in fuel prices slashed the company’s marketing margins. The state-owned oil marketing companies had earlier cut auto fuel prices by Rs 2 per litre, first time after April 2022.
“Typically, overall OMC margins at all three OMCs have a closer relationship with refining margin, and this market seems to be signaling a lower gross refining margin environment in the near future, so OMC margins may likely be under stress too,” Jacob said.
Crude prices are currently at one of their lowest, especially as compared to the previous 12-13 months. This is on account of a number of factors including lower global demand growth, as well as additional supply entering the market. Analysts believe that crude prices may fall further given the Organisation of Petroleum Exporting Countries does not delay unwinding of its production cuts.
“Crude prices are likely to remain range bound between $70-75 per barrel, but may move further downwards, if OPEC doesn’t delay unwinding of their output cuts,” Jacob said. “It is expected that prices of petrol and diesel may fall at the retail end, if the falling crude prices is seen as a consistent trend (which seems to be the case).”
Analysts are expecting crude oil prices to edge lower in the medium term due to an expected surplus in the global market by 2025 despite the Organisation of Petroleum Exporting Countries’ decision to continue the voluntary cuts of 2.2 million barrels per day (bpd) till September 2024.
The International Energy Agency expects non-OPEC supply to rise by a robust 1.4-1.5 million barrels per day in 2024 or 2025.
For the country’s upstream companies, however, analysts see lower margins in the immediate future, putting pressure to their earnings.
State-owned oil producing majors – Oil and Natural Gas Corp and Oil India had reported healthy earnings in Q1FY25 as the net crude oil price realizations of the companies improved. If prices continue to fall, the upstream companies may have to reconsider their costs.
“One will likely see lower margins at the upstream companies’ end in the immediate future, though if the government reduces the windfall tax again (which it did in Aug end), it may provide some margin buffer. One would also likely see upstream companies relook at their costs, and be very prudent on their capex programmes,” he said.
Brent prices hovered around $71 per barrel on Sunday while that of WTI crude fell further to $67 per barrel.
Union minister for Petroleum and Natural Gas Hardeep Singh Puri in an interview with CNBC had indicated that the government is “on the side of lower prices of oil” since the country is dependent for 88% of its crude oil requirements on imports.
He had said that global oil prices are not a result of scarcity but are being sustained by an “artificial holding back of supplies.” He also mentioned that the government is not considering higher taxes on fossil fuels at the moment.
“The price levels are maintained essentially on account of artificial holding back. If the total amount of oil that is available in the world is allowed to be available, then I think we’d be in a slightly more comfortable situation,” he had said.
From: financialexpress
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