New Delhi:
Higher-than-usual imports of Russian oil at significant discounts to market prices could limit the short-term working capital needs of fuel retailers IOC, BPCL and HPCL, Fitch Ratings said Tuesday.
The state-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) have failed to adjust the retail price of gasoline, diesel and cooking gas LPG in recent months. They lead to losses in fuel marketing, which are offset by gains in other areas, such as higher refinery margins from processing cheaper Russian crude.
Fitch said rising global demand and tighter supply of refined products are supporting refining margins and oil companies’ marketing margins are gradually recovering.
Higher-than-usual imports of Russian oil at significant discounts to market prices may also limit OMCs’ short-term working capital needs, it said.
This follows weaker statistics in FY22 as marketing losses put pressure on EBITDA and rising crude oil prices increased working capital needs, partly offset by inventory gains.
We expect retail petrol and diesel prices in India to remain in line with crude oil prices over the medium term, despite sporadic periods of steady retail prices amid heightened oil price volatility.
This should drive a gradual improvement in oil marketing companies’ (OMCs) marketing margins through the remainder of FY23 (2022 to 2023), albeit to below normal levels.
However, if crude oil prices remain above base assumptions in 2022, record high retail fuel prices could limit the propagation of the changes, putting pressure on OMC’s credit statistics.
The three fuel retailers interrupted the daily review of petrol and diesel prices when five states, including Uttar Pradesh, went to the polls last year. They hit a pause button again after raising rates by Rs 10 per liter of range for a period of two weeks from the end of March.
The price of crude oil (from which gasoline and diesel is made) rose from $84 a barrel in early March to a nearly 14-year high of $139, before making any gains. It trades at $119.
Fitch said it expects lower exports of refined products from China, disruption in product flows due to ongoing geopolitical tensions and increased uptake of middle distillates for power generation to maintain tight demand for petroleum products in Asia in the near term.
However, current highs in refining margins should ease in the medium term as new capacity increases and supply-side issues improve.
“We believe the high crude oil prices, the recent 110 percent increase in natural gas prices by the Indian government and our expectation of a further increase in gas prices at the next reset in October 2022 will affect the profitability of ONGC in FY23. and OIL and support their capital expenditures and shareholder returns,” Fitch added.