Indian Oil, HPCL Shares Fall As Rising Crude Prices May Affect Marketing Margin

India's government-owned oil marketing firms could be heading for a weaker second-quarter as Brent crude prices rise and fuel retail prices remain steady.

The companies' bottomline is likely to be impacted by decreasing gross marketing margins, which have already shrunk 45% for petrol, compared to Q1. Margins on diesel dipped into negative territory in August.

Stocks of major public sector unit oil giants, like Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. have also declined. .

Shift in Market Conditions

Since May 22, 2022, leading oil companies have maintained stable petrol and diesel prices in Delhi at Rs 96.72 and Rs 89.62, respectively. With a 3.85% dip in Q1 oil prices, they enjoyed supernormal marketing margins in Q1, which helped recover fiscal 2023 loss, resulting in a combined net profit of Rs 30,500 crore.

However, market conditions have now changed. Brent crude oil prices have surged 17.86%, since July 1 and now stand at $88.62 per barrel as of September 4.

Apart from this, with FY24 being a pre-election year, there's added pressure. The potential for government-driven fuel price cuts could heavily impact margins of oil marketing companies as oil prices rise, making it challenging to pass these costs on to consumers.

The trend of unfavorable stock performance among the companies is not an isolated incident. OMCs have observed subpar or negative performance in previous election years, compared to non-election years.

Effect On Margins

For every $1 increase in the price of a barrel of oil, there is a corresponding impact on gross marketing margins, according to an Aug. 21 note by Prabhudas Lilladher Pvt. The increase in price causes the margin to decline by 50 points per litre.

As of August, the gross marketing margins for petrol and diesel have decreased, reaching Rs 5.5 and Rs 0.7 per litre, respectively. This is in contrast to the figures from Q1 FY24, when they stood at Rs 10 and Rs 12.7 per litre. And in July 2023, when gross marketing margins for petrol and diesel were at Rs 10.1 and Rs 7.4 per litre, respectively.

Support From Crack Spreads

However, oil marketing firms could gain some support on the back of rising crack spreads.

A crack spread represents the pricing gap between a barrel of crude oil and the resulting petroleum products obtained through refining. It is a specific form of gross processing margin within the industry.

Petrol and diesel crack spreads have been rising. From $12.3 per barrel for petrol and $14 for diesel in Q1, the crack spread stood at $13.4 and $30.2 per barrel, respectively, in August.

These levels were also lower than the July 2023 level, which stood at $12.5 per barrel for petrol and $20.3 for diesel.