Oil marketing companies likely to feel the heat of high crude oil prices

RIL a likely beneficiary of higher refining margins; ONGC and Oil unlikely to see major change in estimates

India’s trade account could come under pressure and there could be an inflation push if crude oil prices remain above the $90 per barrel (Brent) for a prolonged period since India imports over 85 per cent of its oil and roughly 50 per cent of its gas.

A rebound in economic activity is bound to lead to higher fuel demand. While India is the third-largest importer of crude, it is a net exporter of refined products, which helps to compensate to some degree.

The recent price surge is due to the supply reduction announcements from Russia and Saudi Arabia. Saudi Arabia has set a production target of 9 million barrels per day (mbpd) for the remainder of the year, down from 11 mbpd in October 2022.

Russia, which also produces around 9.4 mbpd, has extended a reduction of 300,000 barrels per day of export until the end of December. So, Q3FY24 is expected to see high prices.

India has been hiking imports of Russian crude due to the discount in price but that discount, which was close to $30 per barrel in January 2023 is now down to $14. Even so, Russia holds around 34 per cent market share (August) in Indian imports down from 44 per cent (April). The Indian crude basket is averaging around $82-83 for April-August 2023 period, and expected to rise to around $87 for FY24.

Given that the global economy is in a downturn, balancing off imports by raising exports is difficult and hence, the trade balance may deteriorate, and of course, that may mean a Current Account Deficit.

Taken together, the macroeconomic impact could create some more pressure on the rupee.

Given the election pressures, there will be a reluctance to hike retail prices at the pump or in household gas. This could mean oil marketing companies (OMCs) absorbing under-recoveries, and perhaps sharing losses with upstream PSU oil producers.

It could also mean slippage on the fiscal deficit because just as the OMCs will be reluctant to hike retail prices, the government will also be reluctant to cut budgeted spend on infrastructure for the same reasons.

The likelihood is that upstream profits for producers will also be capped due to the windfall tax creating a ceiling above realisations of around $75 per barrel equivalent.

Since international gas prices also move in tandem with crude, LNG prices could rise impacting the margins for city gas distribution (CGD) players who do import.

According to energy analysts, gross refining margins (GRMs) will remain strong, especially in diesel, since the Saudi production cuts will push GRMs up. This means refined exports may compensate to some extent for a higher import bill.

Assuming crude and gas prices do remain elevated however, despite strong GRMs, the impact on the OMCs is likely to be clearly negative. Most analysts are factoring in earnings downgrades for downstream PSUs in the OMC sector. The CGD players may also see earnings downgrades though there’s less clarity on this.

The upstream production PSUs, ONGC and OIL, will not see much change in estimates due to the Windfall tax unless they are pushed to subsidise the OMCs.

The macro consequences of a weaker rupee could include more inflation, which may be a cause of concern for the RBI.

Reliance Industries (RIL) could be a potential beneficiary of exports of diesel and other refined products if GRMs are good.