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Despite demand slump, GRM pressures OMCs'credit outlook stable

Press Trust of India  |  Mumbai 

Despite seeing some slowdown in demand and pressure on gross refining margins (GRMs), domestic rating agency today retained its stable outlook on the marketing sector.

"Notwithstanding moderation in GRMs due to higher crude prices, credit outlook for refining and marketing sector remains stable owing to their high capacity utilisation, low under-recoveries and timely subsidy reimbursement from government," said in a note.

Globally, too, GRMs are expected to weaken in the medium term due to refinery capacity addition and higher crude prices. The crack spreads of most of petroleum products are expected to decline, leading to weakening of GRMs in the near to medium term, the report added.

The only market where demand is expected to grow is China, due to state support to the economy, it said.

The domestic demand may face pressure in the near term due to the slowdown driven by but demand may revive due to overall improvement in economic activity over the medium term, it added.

"Notwithstanding temporary setback in demand in January when demand slipped by 4.5 per cent, due to the note- ban, the marketing margins are expected to be moderate to healthy due to soft prices of petroleum products apart from anticipated healthy demand growth over the medium to long- term," the report said.

Despite rising crude prices, marketing companies are likely to continue to share nil or low burden in gross under-recoveries on sensitive products. The investment in auto fuel retailing is the major area of interest for private companies in the near to medium term.

It can be noted that sale of petroleum products barring LPG and ATF declined in January 2017 by 4.5 per cent, primarily due to slowdown driven by along with destocking of some products and high base effect.

The decline is significant as this is the first fall in recent years and follows high growth of 8.8 per cent in the first nine months of fiscal 2017 and 10.9 per cent in fiscal 2016.

"The major reasons for fall in sales are the temporary economic slowdown driven by note ban, high base effect due to high growth of 16.5 per cent in January 2016, destocking in January end due to price fall expectation and high restocking in December 2016 due to anticipation of rise in prices," the report said.

Crude prices rose after the cartel Opec in November slashed output, which is likely to have a moderating impact on the demand. This had crude prices jumping to USD56/ barrel in December 2016 from USD48/barrel in September.

Crack spreads rose across in Q3 over Q2, light distillate crack spreads and naphtha crack spreads too rose in Q3 over Q2 due to strong demand from Japan and Korea.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, April 10 2017. 18:42 IST