Q3 Earnings Preview: Why Oil Marketers May Post Yet Another Muted Quarter

A fall in refining and marketing margins is likely to weigh on the profit of state-owned oil marketers in the quarter ended December, offsetting the benefit from a possible inventory gain and a rise in consumption.

The Singapore gross refining margin fell to its lowest in at least eight years during the quarter. That’s because of a decline in margin of fuel oil—a residue of petrol, diesel and jet fuel—as ships across the world switched to a cleaner alternative. The Asian benchmark had turned negative in the last two weeks of December.

Also, the margin for other products such as diesel didn’t rise much due to a broader economic slowdown and oversupply in the global market. The double whammy caused the Singapore GRM to tumble 74 percent sequentially to average around $1.7 per barrel in the three months ended December, according to data compiled by BloombergQuint.

While the plunge in Singapore GRM won’t impact Indian refiners—Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd.—much as production of fuel oil accounts for only 3-7 percent for their total production, a fall in margin of other products may hurt what the companies earn for converting one barrel of crude into fuel. That, too, when the Brent Crude price rose.

The Asian benchmark for oil gained close to 9 percent in October-December—the most in three quarters—aided by production cuts announced by the Organization of Petroleum Exporting Countries. Usually, a rise in crude leads to an inventory gain as oil marketing companies that bought stock at lower rates can sell through retail outlets at higher prices.

But the retail fuel prices didn’t move in tandem with the Brent Crude during the third quarter. While crude gained 9 percent, prices of petrol and diesel rose just 1 percent during the period. That restricted oil marketing companies to earn lower marketing margin.

The markup earned on sale of every litre of diesel and petrol fell 27 percent and 9 percent over the preceding quarter, respectively, to Rs 2.7 and Rs 3.1.

That, according to BloombergQuint’s calculations, is expected to impact HPCL and BPCL more as retail sale of fuel contributes nearly 60 percent and 40 percent, respectively, to their operational profit.

But a rise in domestic consumption of petroleum products may cushion the marketing segment.