Shares of downstream OMCs such as Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd have slumped more than 9.5 percent and 8 percent, respectively since March 20 when Brent crude prices had dipped to $70 per barrel.

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Indian oil marketing companies (OMC), which saw a respite in March when global oil prices slumped below $75 per barrel, are in a difficult situation as oil prices are on a boil again.

They are staring at heavy losses if crude prices rise further as they may not be able to pass on this crude price hike to end-consumers, according to analysts.

With the Organization of Petroleum Exporting Countries and its allies (OPEC+) deciding to cut production earlier this month, oil prices shot up to over $85 per barrel, close to the level above which Indian OMCs make heavy losses.

“As of last week, OPEC+'s move has only catapulted Brent back to around the mid-$80s level, where it was before the March sell-off. So, as of now, not much damage done,” said Vandana Hari, founder and chief executive officer of Singapore-based energy intelligence company, Vanda Insights.

It will probably become more challenging for refiners and consumers if OPEC+ sticks to the reduction even if global demand starts bounding higher and the market begins to tighten, pushing crude much higher, Hari added.

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The pricing math

However, an India-based oil and gas research analyst, who did not wish to be named, said, “Even around these price levels, OMCs are incurring a loss of $2-$3 per litre for diesel.”

The price of Brent crude oil is currently at $87.30 per barrel on the Intercontinental Exchange. It has risen more than 9 percent since March 31.
In normal parlance, the breakeven crude oil price is $85-$88 a barrel, above which OMCs start incurring losses, said Manish Chowdhury, head of research at Stoxbox.

“However, the actual calculation of breakeven is complex as it is dependent on diesel and petrol product cracks, currency movement and respective hedging strategy of OMCs, under-recoveries due to unchanged retail petrol and diesel prices,” he added.

OPEC and its allies shocked the market on April 3 by announcing a production cut of 1.16 million barrels per day from May, which is to last until the end of the year. Adding to this, Russia, an important ally of the cartel, had said in February that it was reducing production by 500,000 barrels per day.

Negative impact

Kotak Institutional Equities believes that the recent spike in oil prices is likely to affect OMCs negatively, especially because these companies may not be able to pass on the rise in crude prices to the end-consumers.

Over the past one year, stock prices of OMCs have underperformed 16 percent when compared with the Nifty50 index.

Shares of downstream OMCs such as Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) have slumped more than 9.5 percent and 8 percent, respectively since March 20 when Brent crude prices fell to $70 per barrel. Experts said these stocks may slide further if global crude rates inch higher.

“A higher oil price is negative for downstream oil marketing companies as under-recoveries on petrol, diesel and LPG may return if prices rise to over $90/bbl as we believe OMCs are unlikely to get pricing freedom at least until 2024 general elections,” a Kotak report said.

Experts believe that crude oil prices are likely to remain elevated in the near term as higher demand from China and a steep fall in US inventories balance economic growth concerns.

“Retail prices remaining unchanged despite a rise in crude oil on a sustained basis could spell trouble for OMCs as it may impact the blended marketing margins of these companies,” Chowdhury of Stoxbox said.
“Moreover, an under-recovery on petroleum products may put further stress on the balance sheets of OMCs,” he said.

$100/bbl price concerns

According to the International Energy Agency, global oil demand is set to surge by 3.2 million barrels a day from 1Q23 to 4Q23, taking average growth for the year to 2 million barrels per day.

At present economic worries are too strong for a 1.2-million-barrel a day reduction by OPEC+ to catapult crude above $90, said Hari.

Having noted that, oil prices may inch closer to the century mark if supply remains lacklustre. This is likely to take a toll on the OMCs in the months to come.

Upstream companies may gain

In terms of upstream companies such as Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL), the recent spike in prices, coupled with the reduction of the windfall tax on domestic oil production, paints a rosier picture. The decision to cut the windfall tax came on the back of lower crude oil prices in March.

“It remains to be seen whether this zero windfall tax regime could be sustained over a period of time to materially benefit companies such as ONGC and Oil India,” Chowdhury said.

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