Indian OMCs source crude at competitive rates in March amid Iran war

March crude procurement costs for Indian OMCs remained steady year-on-year in dollar terms and rose only slightly from February, despite the West Asia conflict

Indian oil marketing companies (OMCs) were little affected by the war in West Asia, securing crude oil supplies — a key material for making petrol and diesel — in March at costs well below breakeven, according to data accessed by Business Standard and interviews with refining officials.

 

While global crude oil benchmarks increased by more than 60 per cent in March following the US and Israeli attack on Iran on February 28, Indian OMCs were protected from the price surge because they had concluded supply contracts before the war began, according to calculations based on latest government data and senior refining sources.

 

The average cost of crude oil procurement — a barometer of what it costs Indian OMCs to supply petrol and diesel to motorists — was relatively unchanged in March in dollar terms from a year earlier and only marginally higher than in February. OMCs increased petrol and diesel prices by ₹3 per litre on Friday. Before that the breakeven crude oil price for refiners in March was around $80-$82 per barrel (bbl) — the price at which OMCs earn their normalised marketing margins of ₹5 per litre, a Mumbai-based analyst said. “Post the price hike, the break-even oil price increases to $85 per barrel,” according to a note today by Mumbai-based Dam Capital.

 

On a rupee basis, March crude oil imports were about 7 per cent higher, government data showed. It cost refiners ₹92.7 to a dollar this March to import oil compared to ₹86.6 a year earlier.

 

Indian importers led by Indian Oil, Bharat Petroleum and Reliance Industries paid an average of $77 bbl for various crude oil grades in March, compared to $76 a year earlier on a delivered basis after including freight and insurance, according to calculations based on Indian Customs data. Prices averaged $67 per bbl in February. Crude oil from Angola, Nigeria, Brazil and the US cost much less this March than a year earlier, Customs data showed. Official crude oil pricing data for April will be available in early June.

 

Refining officials said sourcing costs surged in April because benchmark crude oil levels increased in March, the basis for April payments. But prices of physical crude have since softened, raising questions about the extent and duration of OMC losses compared to the official data of ₹1,000 crore a day, which includes LPG. Premiums on physical crude have crashed from $20-30 per bbl in early April to “levels essentially below 2024/25 averages is pretty crazy,” said Neil Crosby, analyst for global market intelligence company Sparta.

 

A senior analyst with a global ratings agency said that for the past few years, India’s pump prices for petrol and diesel typically aligned with international crude prices around $80 per barrel — a position previously held by oil industry officials. The breakeven has since climbed to around $100 per barrel after the government cut excise taxes on fuels last month, he added. That means OMCs’ marketing margins at current pump prices stay positive if crude prices are at or below breakeven levels.

Delivered prices

Delivered prices of oil are the most reliable benchmark to calculate procurement costs, a Mumbai-based analyst said.

 

Company and industry data showed that OMCs were making positive marketing margins in March when delivered prices were around $76 per barrel. The analyst pegged the net blended marketing margin for petrol and diesel at around ₹6 per litre. However, oil companies claimed losses of ₹20 per litre this March at similar crude costs. A senior trader with a state refiner explained that OMCs do not consider actual crude sourcing costs to calculate marketing margins. Instead, they calculate pump prices and margins by using an export parity formula that relies on market prices of diesel and petrol in Dubai.

 

“Current under-recoveries on petrol/diesel are ₹16 per litre. Post the price hike, the under recoveries would come down by around ₹2.5 per litre (post VAT adjustment) to ₹13.5 per litre,”' according to a note by Mumbai-based Dam Capital. “Post the price hike, the break-even oil price increases to $85 per bbl.”

 

Hindustan Petroleum chairman Vikas Kaushal told analysts early this week that crude was expensive and products were selling at losses. But he declined to comment on the company’s inventory gains in March or on the level of losses. He declined to give guidance.

 

But industry officials said India has accumulated crude oil stocks at low prices. The country has about 60 days of crude and product stocks, Oil Minister Hardeep Singh Puri has said. Refiners hold about 20 days of crude product stocks in refinery tanks, a Mumbai-based analyst said. Refining officials said inventories were built during the pre-war period when Brent traded around $62 per barrel before jumping to over $125 per barrel in March. Indian Oil and Bharat Petroleum could not be reached for comment.

 

European benchmark Brent was trading at $65 per barrel when the Iran war began and has since increased to as much as $120 per barrel while immediate or spot crude prices reached as much as $160 a barrel in April. Brent accounts for 70 percent of the Indian crude oil price basket, according to PPAC, a division of the Oil Ministry.

Marketing margins

Prashant Vasisht, senior vice-president and co-group head of ratings agency Icra, said: “The modest hike in retail price provides limited relief to the oil marketing companies. Icra estimates that at crude price of $105-110 per barrel and considering past 10-year average crack spreads of auto fuels, oil marketing companies incur a loss of about ₹500 crore daily on the sale of auto fuels and domestic LPG, even after factoring the fuel price hike.”

 

But senior officials of Indian OMCs have maintained in analyst calls a breakeven of $85-95 a barrel after accounting for rupee depreciation, a Mumbai-based analyst said. The analyst said that Hindustan Petroleum loses more because it has to purchase petrol and diesel at international rates, but Indian Oil is nearly covered because it has adequate refining capacity.

 

Icra estimated that at a crude price of $120-125 per barrel and considering past 10-year average crack spreads of auto fuels, oil marketing companies incur a loss of about ₹1000 crore daily on the sale of auto fuels and domestic LPG.