Rating agency ICRA highlighted that the marketing margins on retail sales of auto fuels for the Indian oil marketing companies (OMCs) have improved in the recent weeks with reduction in crude prices. ICRA’s outlook on the refining & marketing sector remains stable.

Commenting on marketing margins, Girishkumar Kadam, Senior Vice President and Group Head, Corporate Ratings, ICRA Ltd, said: “ICRA estimates that the OMCs’ net realisation was higher by ~Rs.11/litre for petrol and ~Rs.6/litre for diesel vis-à-vis international product prices in January 2024 (till January 19).

“The marketing margins for petrol witnessed an improvement in the last few months after a sharp decline in September 2023. While the margins for diesel were negative till October 2023, they rebounded and turned positive from November 2023. The retail selling prices of these fuels have been unchanged since May 2022 and headroom for their downward revision may emerge if crude prices remain stable.”

The prices moderated in the last few months owing to tepid Chinese oil demand coupled with elevated production and inventory levels in the US, despite tightening supply, post the extension of supply cuts by the OPEC+.

The Special Additional Excise Duty (SAED) on petroleum products was reduced in line with international product prices. It had witnessed multiple revisions since it was initially imposed in July 2022. In the latest revision on January 01, 2024, the SAED was decreased on diesel and ATF to nil and remained nil on petrol.

The Singapore GRMs witnessed moderation in Q3 FY2024 to ~$5/bbl due to lower product prices across all the major products. The end of summer season and reduction in demand along with higher product supplies decreased the crack spreads for gasoline. The gasoil prices also fell due to demand-side issues. There was no pick-up in China’s consumption, which put pressure on the overall demand for the products.

Commenting on the OMCs’ profitability, Kadam said: “The OMCs reported healthy operating margins in H1 FY2024, recouping the losses incurred during FY2023. The aggregate operating profitability of the OMCs was ~Rs. 90,000 crore in H1 FY2024 against a loss of ~Rs. 14,600 crore in H1 FY2023.  Despite moderation in the GRMs, the improvement in marketing margins is likely to result in the OMCs maintaining their profitability in Q3 FY2024.”

ICRA’s outlook on the refining & marketing sector remains stable. Petroleum, oil & lubricants (POL) consumption in India witnessed YoY growth of 5% in 9M FY2024 with a similar growth rate expected for FY2024. Further, the POL consumption is expected to witness a 3-4% growth in FY2025, driven by economic growth, increasing mobility and air travel.

The domestic refining capacity is expected to increase to 306 million MT over the next three to four years from the current capacity of 254 million MT as of December 2023 to support the increased consumption and exports. ICRA expects the capacity utilisation of the PSU and the private refiners to remain healthy in FY2024. The OMCs have planned a significant capex in the refining segment.