The sharp decline in marketing margins due to rising crude oil prices and product spreads will impact the profitability of oil marketing companies (OMCs) in the July-September quarter, according to a Nomura report.

Among these state-run downstream refiners, Hindustan Petroleum Corp Ltd. (HPCL) will bear the maximum brunt given its higher share of the marketing segment as part of its earnings.

The blended marketing margin, which represents the profit earned by selling fuels at petrol pumps, declined sharply to a negative Rs 4.7 per litre from a negative Rs 2.9 per litre in the week ended September 24, 2023, as per the Nomura report.

Nomura further wrote that blended marketing margins have declined sharply by 80 percent sequentially to below normative levels of Rs 2 per litre during the September quarter as crude prices and product spreads have increased, while retail product prices have remained unchanged.

Consequently, the OMCs are now recording under-recoveries of Rs 7.4 per litre on the sale of auto fuels.

“Based on current crude and product prices, blended marketing margins are deep in the red at a negative Rs 5.3 per liter,” the report added.

For diesel, marketing margins have declined to a negative Rs 5.7 per litre in the week ended September 24, 2023, from a negative Rs 3.9 per litre in the previous week. Petrol margins have declined to a negative Rs1.7 per litre from break-even levels in the previous week.

Refining margins in focus

Nomura expects refining margins of these companies to remain elevated in the coming months as global oil demand remains healthy and the supply side and inventories remain stretched. The brokerage expects refined product markets to tighten further in the December quarter, as large refineries across the globe have announced planned maintenance activities.

“Our bottom-up analysis indicates that 1.5 million barrels per day refining capacity will be in various stages of maintenance from September onwards across Russia, EU, US and India,” the report said.

Reliance Industries, BPCL and IOCL are some of the refiners taking a planned shutdown.

‘Buy’ rating on Reliance Industries

Nomura has reiterated its ‘buy’ rating on Reliance Industries as the Mukesh Ambani-led oil-retail-telco conglomerate is best-placed to benefit from a robust refining construct.

The brokerage said that Reliance's EBITDA and Earnings per Share have a 2 percent and 4 percent sensitivity respectively for every dollar increase in refining margins.

RIL also benefits from its advantageous crude oil sourcing, which will keep realised margins at a significant premium to benchmark margins, it added.

(Edited by : Hormaz Fatakia)

First Published:Sept 28, 2023 9:32 AM IST