Volatility in oil prices, uncertain petroleum demand impacting Indian OMCs

OMCs have so far maintained product prices in the marketing segment, which may act as a buffer for any increase in crude oil prices.
Volatility in crude oil prices and an uncertain petroleum demand over the last fortnight have come as a cause for concern for oil marketing companies (OMCs).

“Crude prices had rallied 25 per cent on Thursday after Saudi Arabia called an 'urgent meeting' of the OPEC+ alliance and other producers to negotiate an output cut deal. NYMEX front-month crude settled at $25.32 per barrel, up $5.01,” S&P Platts noted in a report on Friday.

US President Donald Trump had on Thursday indicated a production cut agreement of 10 million barrel per day to 15 million barrel per day. “Despite the sudden jump in crude price on Thursday, after Trump’s tweets, oil prices are expected to remain depressed, which works fine for OMCs,” said Debasish Mishra, partner at consultancy Deloitte Touche Tohmatsu.

An output cut, at best, will put a floor to the falling crude prices, but it may not stabilise demand-supply dynamics.

“Demand is falling at a faster rate,” said an analyst with a domestic brokerage firm. Executives from OMCs have raised similar worries. So far, Indian Oil Corporation (IOC) has already slashed refinery throughput by up to 30 per cent. Bharat Petroleum Corporation (BPCL) has cut throughput by 20 per cent. Both moves are to align with the falling product demand in the country’s market. Executives said if the April 15 deadline for the nationwide lockdown is extended, refineries may need to take steeper cuts.

“OMCs are used to volatility in crude oil prices. One day’s spike or fall does not worry us. If the prices remain steady, we will have to worry about inventory loss or gain. So far, diesel margins are looking better in comparison to other products. In addition, a steady high price will also impact working capital,” said an executive with one of the state-run oil companies.

Analysts have already factored in huge inventory losses for the March quarter. “The impact of the current volatility on inventory will reflect in the June quarter numbers,” added the analyst. He pointed out that OMCs have so far maintained product prices in the marketing segment, which may act as a buffer for any increase in crude oil prices.

Owing to the fall in demand, reports suggest that companies like IOC and Hindustan Petroleum Corporation (HPCL) have already issued force majeure notices to certain suppliers. Not everyone, however, is convinced the move will help significantly. “The method has its own positives and negatives. It is yet to be legally established if it is an act of god. One needs to weigh if the cost of arbitration is higher than the cost of demurrage for floating your cargo,” the oil executive had earlier added.

“In the current volatile price scenario, the force majeure clause will help only to the extent of holding lower inventories for the June quarter and avoiding any inventory loss in the event of prices staying high in April,” the analyst had added.

Others remain confident of the medium to long term prospects for Indian refiners. Vikas Halan, senior vice-president, corporate finance group, Moody’s Investors Service said, “ We view the current situation as temporary rather than structural. The medium to long term growth expectation of petroleum product demand in India remains intact and could possibly improve if oil prices remain low. The aviation fuel demand, however, will take longer time to recover.”

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