Sharp Fall In Crude Oil Prices Costs Fuel Marketers Over Rs 17,500 Crore

India's state-run fuel marketers suffered their highest inventory loss in at least five years in the December-ended quarter due to a sharp fall in crude oil prices.

The combined inventory loss incurred by the three listed oil retailers—Indian Oil Corporation Ltd., Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd.—rose to Rs 17,500 crore in the three-month period. That was largely due to Brent crude, the Asian benchmark, declining from its peak of $86.29 per barrel to $50.47 per barrel in the quarter due to oversupply concerns amid tepid demand growth.

Oil refiners import and stock crude oil for processing and incur inventory losses when prevailing prices fall below that at which stocks were purchased.

That squeezed oil refiners and marketers who generally do business on wafer-thin margins. The operating margins of the three state-run companies fell to at least a three-year low in the three months through December. IOCL and HPCL's earnings before interest, taxes, depreciation, and amortization margins were the lowest in the last three years, while that of BPCL was at five-year low.

However, adjusting for inventory losses, the Ebitda grew at least four-fold quarter-on-quarter. The oil marketers managed to report profit against expectations of losses from analysts due to foreign exchange gains, stronger refining margins, higher other income and lower interest cost.

Relatively stable crude oil prices and higher marketing margins are expected to help the oil marketers bounce back in the quarter ended April 2019.

Gross marketing margin, or the markup earned by oil marketers on the sale of every litre of petrol and diesel, has averaged at Rs 6 so far—the highest since at least the first quarter of FY2016, according to data compiled by BloombergQuint.

The higher gross marketing margin is expected to benefit HPCL and BPCL the most as the contribution of retail fuel sales to their operational profit, according to BloombergQuint's calculations, is nearly 60 percent and 40 percent, respectively.

The oil retailers are likely to keep their marketing margins higher in the fourth quarter, due to the onset of general elections. Previously during election periods, oil marketers refrain from hiking fuel prices, impacting their gross marketing margin.

However, weaker gross refining margins—the amount a company earns for converting a barrel of crude oil into fuel—could play spoilsport. The Singapore GRM—the Asian benchmark—fell for the fifth consecutive month due to oversupply concerns amid tepid demand growth. It averaged around $2.4/barrel in the quarter—the lowest in at least the last eight years. A lower GRM means refiners would earn less.