According to Moody’s Investors Service, high Crude Oil Prices would affect India’s three state-owned oil marketing corporations, IOC, BPCL, and HPCL. The three firms’ capacity to pass on higher raw material prices by hiking retail pricing this fiscal year will be limited by elections in May 2024…

Moody’s Investors Service predicts that fuel and diesel prices will not rise due to rising raw material costs and general elections. Indian Oil Corporation, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd, which control 90% of the market, have frozen petrol and diesel prices for 18 months. International Oil Prices have climbed since August, reducing the margins of three merchants. “High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India — IOC, BPCL and HPCL,” according to a report by Moody’s Investors Service.

“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024.” During the quarter ended June 30, 2023 (1Q fiscal 2024), the OMCs’ marketing margins—the difference between their net realized pricing and worldwide prices—have declined considerably. Since August, diesel marketing margins have been negative, while petrol margins have decreased as global prices have risen.Moody’s reported a 17% increase in raw material costs due to a 17% rise in crude oil prices in September, primarily due to OPEC’s 1 million barrels a day production cuts until December 2023 and Russia’s 300,000 barrels a day export cuts. This has led to higher oil prices. It found that when global development slows, high oil prices are unlikely to endure.

“Gross refining margins have aided the recovery of OMC marketing margins.” The benchmark Singapore GRMs have risen since June as a result of rising liquid fuel consumption and planned refinery disruptions that have reduced petroleum product supply “… GRMs and international transportation fuel costs are expected to fall in the coming quarters as concerns about China’s economic crisis restrict demand and refineries reopen following scheduled maintenance.

“Although a smaller gap between international and domestic prices will reduce marketing losses for the OMCs, their overall profitability will remain weak as retail selling prices will likely remain unchanged,” he said. As oil prices remain high, OMCs’ operating performance is anticipated to deteriorate in the coming year, despite strong April-June quarter results. Even if crude oil prices remain around USD 85 to USD 90 per barrel in the second half of fiscal 2024, the three companies’ profitability in fiscal 2024 (April 2023 to March 2024) will be strong and higher than in prior years.

This is owing to OMCs’ strong first-quarter fiscal 2024 earnings. “The three companies’ first-quarter EBITDA was close to their average yearly EBITDA in recent years.”Moody’s estimates that if crude oil prices rise to USD 100, OMCs will begin to lose EBITDA in the second half of fiscal 2024. Marketing margins for gasoline and diesel improved 1Q fiscal 2024 operating performance.

Despite declining feedstock costs, OMCs’ net realized diesel and gasoline prices have been steady since April 2022. Brent crude declined from USD 112 per barrel (bbl) in 2023 to USD 78 in the first quarter of fiscal 2024. Due to their business profiles, IOCL and BPCL, according to the rating agency, are better positioned to weather any further increase in crude oil prices than HPCL.

Because of their larger operations and significant integration of their refining and marketing businesses, IOCL and BPCL may be affected by changes in the operating environment. The petrochemical and pipeline businesses of the corporation demonstrate its adaptability. HPCL is more vulnerable to pricing fluctuations due to its smaller size and more emphasis on marketing.

“In recent months, OMCs’ working capital requirements and borrowings have been reduced by strong 1Q fiscal 2024 profitability and lower crude oil prices compared to fiscal 2023.” As a result, we anticipate that debt/EBITDA leverage for all three firms will remain well above rating limitations through fiscal 2024. “It claimed that despite significant capital spending and shareholder payouts, rising crude oil prices are increasing working capital needs.”

The Indian government offered Rs 30,000 crore in capital support for the oil marketing sector in the budget earlier this year, which will improve OMC cash flows and partially meet their capital investment needs. The government has been apprised of the rights issues by IOCL and BPCL. Moody’s has not factored this into its forecasts because the timing and magnitude of such revenues are unknown.

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