ONGC and Oil India fell the most as the decline in crude prices will hit their net realisations significantly. The cost of oil production for ONGC, including capex for maintaining output from oil fields, is close to $31 a barrel, while for Oil India it is $25-26 a barrel, according to analysts. Thanks to tumbling crude prices, these companies
now stare at losses at the operating level, if the weakness persists.
For refiners like Reliance Industries (RIL), which is already seeing pressure in its refining segment's profitability due to demand woes, the fall in oil prices also means that it may report inventory losses thereby pulling down its refining margins further, say analysts.
Though Reliance Industries clocks relatively higher gross refining margins or GRMs (compared to OMCs) due to its crude sourcing ability and complex refinery, its GRM was estimated to decline to $7.5 in the March quarter from $9.2 in Q3'FY20.
Likewise, state-run oil marketing companies
(OMCs; Hindustan Petroleum, Bharat Petroleum and Indian Oil), too, will feel the heat on refining margins and report inventory losses. But, they would also benefit from the ongoing positive trend in marketing margins. Further, lower oil prices benefit OMCs as they need to pay less for imports and hence it lowers their working capital requirements.
For the refining industry, GRMs have been under pressure in the last couple of months due to weak demand. The benchmark Singapore GRM had averaged at $1.2 a barrel during March quarter, lower than $1.6 in previous quarter and less than half of $3.2 a barrel in year-ago period.
Meanwhile, post the inventory write-downs, OMCs will remain in a sweet spot in a low oil price environment. Currently, OMCs are earning net marketing margin of Rs 13 per litre on petrol and diesel. This will likely improve given the fall in oil prices. Analysts estimate that a $1 fall in crude prices lead to Rs 0.45 per litre improvement in net marketing margins on petrol and diesel. Yogesh Patil at Reliance Securities says that marketing margin will remain at all-time highs subject to no increase in excise duty after normalisation of petroleum product sales. Amongst OMCs, Bharat Petroleum remains his top pick. The question is when will the economy crawl back to normalisation?