Softer crude prices will bolster margins of oil marketing companies: CRISIL

Oil marketing companies (OMCs) are likely to make a windfall profit of Rs 5-7 per litre on the sale of petrol and diesel in the current financial year as pump prices remain largely unchanged despite softening crude oil price in the global markets, CRISIL said in a report.

Crude oil price averaged at $94 per barrel in the financial year ended March 2023. In the current financial year the average price of crude oil is projected at $80 per barrel. However, retail pump prices have remained unchanged since May 2022.

According to a CRISIL analysis, oil marketing companies incurred a marketing loss of Rs 8 per litre during the financial year 2022-23. However, OMCs managed to make profit during the fiscal year ending March 2023 on the back of strong refining margins that averaged $15 per barrel.

“This fiscal should see a switch in the growth drivers. Marketing margins could veer to an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to $6-8 per barrel as global product demand-supply imbalance eases,” said Naveen Vaidyanathan, Director, CRISIL Ratings.

This forecast is predicated on crude oil price averaging $80 per barrel and no cut in retail pump prices, he said.

Elevated price of petrol and diesel despite easing crude oil price may lead to three times jump in operating profit of oil marketing companies that include Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum.

Operating profit of OMCs is estimated to jump to Rs 1 lakh crore in the current financial year from Rs 33,000 crore recorded in 2022-23. The average profit of OMCs between 2017 and 2022 stood at Rs 60,000 crore.

The government-owned OMCs make profits from two sources – refining and marketing. They earn through refining margin which is the value of refined products at the refinery gate minus the cost of crude oil used to produce them. Under the marketing head, the OMCs earn a margin on petrol, diesel and other petroleum products sold mainly through retail pumps.

The rebound in operating profit is critical for the sector that has seen a significant increase in capex — as much as Rs 3.3 lakh crore between fiscals 2017 and 2023 — to expand capacity in downstream refining and petrochemicals, pipelines and marketing infrastructure.

OMCs’ gross debt more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, as capex increased even though profitability remained subdued. OMCs capex is pegged at Rs 54,000 crore for the current financial year.