Oilcos may slip on softening crude

Standalone & Private Sector Refiners Likely To Perform Better Than Oil Marketing Cos

CRUDE oil, which had of late become an asset, registered a major meltdown as the turmoil in the global financial markets hit a new peak. Within weeks, NYMEX crude oil futures fell below $93 on September 16, 2008. Although it recovered to $110 level after that, by Septemberend the prices are again back at $96. Considering the $147 peak in July 2008, crude prices have lost nearly 35% through the quarter ended September 2008.
While low petroleum prices in general are welcome for the Indian petroleum industry, which is reeling under huge under-recoveries, the sudden crash in oil prices actually means more losses. This happens because petroleum refiners purchase crude at a higher price and by the time they process and ready it, the refined products for sale command a substantially lower price in the market. There is usually a gap of 30 days between purchase of crude and sale of refined products. When Indian petroleum refiners publish their performances in September 2008 quarter later this month, the phenomenon is likely to lead to a heavy erosion in their gross refining margins (GRMs). This will be in sharp contrast to the preceding quarter, when the sustained rise in crude oil prices had enabled them post super-normal GRMs and a spurt in profits.
“The refinery margins, which are otherwise healthy at $6-7 per barrel, will get hit by the inventory losses in September quarter,” told Indian Oil finance director SV Narasimhan. The company had posted historically highest GRMs of $16.8 per barrel in the June 2008 quarter on hefty inventory gains.
MRPL finance director LK Gupta agreed, “The inventory losses could be so big this time that the entire GRMs might get wiped out. However, it will just average out the booster we got in the preceding quarter.” Like most other domestic refiners, MRPL too had posted its record high GRM of $18.1 in the June 2008 quarter.
An analysis of a similar oil price crash in August 2006 to January 2007 period — when crude oil prices tumbled one way from $77 to $50 — shows the huge pressure that domestic refiners faced on their GRMs. (See table). The only exception was RIL, which posted healthy GRMs — although lower than the year’s average — during September 2006 and December 2006 quarters.
RIL was an exception even in the June 2008 quarter, when it did not book inventory gains, allowing the public sector refineries to post GRMs higher than its own, perhaps for the first time in its history. It is, therefore, expected that even this time round, RIL would escape with a healthy doubledigit GRM as against the other domestic refiners, who will post low single digit or possibly even negative GRMs.
The general business environment has also deteriorated for petroleum refiners with a weakening in the buoyant GRMs witnessed in earlier months. “In July, we saw diesel cracks abnormally high above $40 per barrel, which have now come down to around $20 levels,” informed Narasimhan.
At the same time, marketing operations of the state-owned oil marketing companies — IOC, BPCL and HPCL — continue to lose money. “Our daily loss on marketing is still over Rs 200 crore. Weakening of rupee is adding to our woes. And considering the weak global investment outlook, there is little possibility that rupee will strengthen in the immediate future,” informed SV Narasimhan.
With a number of factors going wrong, domestic petroleum refiners are expected to come out with dismal results for the upcoming quarter. Standalone and private sector refiners including MRPL, Chennai Petroleum, RIL and Essar Oil will be somewhat better off compared to the marketing players like IOC, BPCL and HPCL. While RIL is likely to battle the odds to post a double-digit GRM, some of the others could even dip in the red.