Refiners stare at Rs 25,000 crore inventory loss: Crisil Ratings

Indian oil refiners may have incurred an inventory loss of Rs 25,000 crore in the January-March period as oil prices slumped and are now likely seeing a plunge in refining margins in the current quarter, Crisil Ratings said on Thursday.

Crude prices nosedived from an average USD 55 per barrel in February to USD 33 in March and around USD 20 at the end of March as demand slumped because of the COVID-19 pandemic.

The mayhem in the oil market meant that by the time crude oil is processed and converted into fuel, the rates have fallen, resulting in inventory losses.

"For oil refiners, the COVID-19 pandemic is delivering two blows: inventory loss of over Rs 25,000 crore in the January-March quarter because of a 70% fall in crude oil prices, and a likely plunge in gross refining margins (GRMs) in the first quarter (April-June) of fiscal 2021 because of demand destruction," Crisil said in a note.

Oil cartel OPEC and its allies on April 12 managed to strike a deal for a record production cut of 9.7 million barrels per day. Yet crude prices have hovered low because of the pandemic-induced plunge in demand across the globe.

"This has caught refiners on the wrong foot," it said.

India has a total refining capacity of 250 million metric tonnes per annum and refiners keep an inventory of 20-50 days of crude on average to avoid disruption in operations.

The rapid fall in crude oil prices would mean an inventory loss of USD 10-20 per barrel.

"The loss would be offset once crude oil prices rebound, but the process would take time given that the slump in global demand is expected to prolong," it said.

Sachin Gupta, Senior Director, Crisil Ratings, said: "Inventory losses would be more for refineries located away from the coast because they have to stock crude oil for longer periods. That means refiners will have to borrow more working capital to fund the crude oil purchased earlier."
Nitesh Jain, Director, Crisil Ratings, said: "Lower throughput and lower margins resulting from suppressed demand outlook will hurt the credit metrics of oil refiners. Though strong government/parent support will lend a shoulder, and continue to support the overall credit profiles of refiners."