Analysts see pressure on RIL, OMC's profitability amid firm oil prices

Their expectation is based on the recent action in October by the OPEC of cutting production by 2 million barrels per day. This suggests that the OPEC is looking to defend price, they said

Reliance Industries (RIL) and oil marketing companies – Hindustan Oil Corporation (HPCL), Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) – could see their profitability come under pressure in calendar year 2023 (CY23), said analysts at Jefferies in a note, who expect the crude oil prices to remain elevated during the next year.

Their expectation is based on the recent action in October by the Organization of the Petroleum Exporting Countries (OPEC) of cutting production by 2 million barrels per day (mb/d). The decision, they said, suggests that the OPEC is looking to defend price rather than protecting market share.

"Facts Global Energy (FGE) expects OPEC to defend oil prices in $90-$100 a barrel (bbl) range and adjust supplies to balance the market. FGE sees limited impact from EU sanctions on Russian crude imports (w.e.f. December 5) as these volumes can be redirected and absorbed by China and India. China remains a key swing factor for oil with incremental oil demand of nearly 1.5 mmb/d on reopening presenting upside risk to oil price," wrote Bhaskar Chakraborty and Niraj Todi of Jefferies in a recent note.

OPEC, meanwhile, also lowered its forecast for 2022 global oil demand growth for a fifth time since April and further trimmed next year's figure, citing mounting economic challenges including high inflation and rising interest rates. It now forecasts oil demand in 2023 to increase by 2.24 million barrels per day (bpd), down 100,000 bpd from the previous forecast amid recession fears.
 

That said, EU sanctions and the G7's price cap on Russian oil could upend some 2.5 million b/d of seaborne oil trade to Europe as Russian crude and oil products struggle to find new buyers outside the trade bloc, according to analysts at S&P Global Commodity Insights.

At the bourses, stocks of oil marketing companies have been under pressure in the last few months are barely trading above their respective 52-week lows. Thus far in CY22, HPCL, BPCL and IOC have lost up to 28 per cent as compared to around 6 per cent rise in the S&P BSE Sensex, data show.

The S&P BSE Oil & Gas index, however, has been an outperformer with a rise of 15 per cent during this period, though mostly attributable to a 10 per cent rally in index heavyweight RIL and a 126 per cent gain in shares of Adani Total Gas.

"Amongst our coverage, RIL's oil-to-chemical (O2C) segment could see weaker profitability if refining margins weaken. Lower refining margins will also hurt OMCs and high oil price could result in continued marketing losses on diesel with no clarity on further government’s support," Chakraborty and Todi said.

Meanwhile, in the past one year, Brent crude oil prices have risen over 13 per cent - from around 82 per barrel (bbl) to nearly $93/bbl now. During the year, they had shot up to nearly $130/bbl as geopolitical concerns took centre stage.

HPCL and IOC, according to A K Prabhakar, head of research at IDBI Capital have been underperformers at the bourses in the last five years and does not expect a turnaround performance anytime soon. BPCL, he said, did well on disinvestment hopes.

"With the upcoming general elections in 2024 and the number of state elections until then, the government may not revise the prices of auto fuels (petrol, diesel). If international prices of crude oil do not soften, OMCs will not make a huge profit. As it is, these companies are seeing inventory losses on account of high oil prices. That apart, the demand is increasing locally and the supply remains a constraint. This is a negative for OMCs," he said.