Inventory Gains To The Rescue Of Oil Marketing Companies 

Inventory gains due to higher crude oil prices could offset the negative impact of falling marketing margins and gross refining margins of the three state-owned oil fuel marketers in the quarter ended June.

Marketing margins of Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. fell to their lowest in at least three years amid higher crude prices, the depreciating rupee and the price freeze ahead of the Karnataka elections.

Gross marketing margin is the mark-up earned by fuel marketers on the sale of every litre of petrol and diesel. On average, the retailers' margins fell over 40 percent compared with the previous three months in the quarter ended June.

Retail prices of diesel and petrol in India have been deregulated and move in line with global trends. However, that wasn't the case in the June-ended quarter. They weren't hiked for 19 days from April 24 in a pre-Karnataka poll freeze by the retailers. A similar trend was witnessed in the December-ended quarter during the Gujarat assembly elections. Multiple brokerages have cited concerns over sustainability of marketing margins with assembly polls slated in Mizoram, Rajasthan, Chhattisgarh and Madhya Pradesh before the next Lok Sabha elections in May 2019.

While prices of crude surged nearly 17.5 percent in the June-ended quarter, auto fuel prices rose by up to 2-4 percent, according to Bloomberg data. That's expected to impact HPCL and BPCL the most. According to data compiled by BloombergQuint, the contribution of retail sales of fuel to their operational profits is nearly 60 percent and 40 percent, respectively.

Brent crude, the Asian benchmark for crude oil prices, averaged around $75 per barrel in the June ended quarter — 11.5 percent higher compared to the previous quarter. If the market price of crude falls, refiners that bought oil at higher prices end up selling at lower rates through retail outlets, and vice-versa. Since the average crude prices are higher this quarter, refiners are expected to earn more since they purchased oil at a lower rate, giving them inventory gains for the third straight month.

Singapore gross refining margins, the Asian benchmark, have averaged around $6 per barrel during the quarter— down from the previous three months. The drop can be attributed to a slowdown in fuel consumption and rise in supply of refined products in the global market. A lower GRM means refiners earn less for processing every barrel of crude.