Due to lower Brent prices and unchanged retail fuel prices in Q1, the implied marketing gross margin (GMM) for OMCs had improved to Rs 8.8 per litre from Rs 3.1 per litre in the previous quarter.
This week’s sharp rise in Brent price after OPEC+ leaders Saudi Arabia and Russia announced that they would extend supply curbs through the end of the year has led to OMCs’ GMM declining to negative 0.1 per litre, according to calculations done by JM Financial.
“There is a high expectation that the government may also cut petrol/diesel prices by Rs 3-5/ltr around Diwali given key state elections start from Nov-Dec ’23. This cut should mostly happen via a reduction in excise duty and/or VAT given OMCs are losing on the auto-fuel marketing business at the current high crude price,” said JM Financial’s oil and gas analysts Dayanand Mittal and Shivam Gupta.
They do not rule out a scenario whereby the government may nudge OMCs to cut petrol/diesel prices as their balance sheets have largely been repaired due to likely strong profits in 1HFY24.
Last week, the government reduced the price of domestic LPG by Rs 200 per cylinder for all 330 million domestic LPG consumers to give relief to the common man from the recent surge in inflation. OMCs have not changed the retail prices of petrol and diesel for more than a year now.
“Elections are near and come what may, the government will not raise prices of diesel and petrol. More likely is the cut in prices as OMC have made good money in the last six months,” InCred Equities said in a recent report.Historically, there has been a pause on price hikes amidst key elections but OMCs usually get back pricing freedom post elections.
Ahead of the Lok Sabha elections scheduled for May 2024, assembly elections are due in states like Mizoram, Chhattisgarh, MP, Rajasthan and Telangana in December-January.
Analysts say the marketing segment earnings of OMCs could come under risk if Brent crude price sustains above $85 a barrel or if OMCs are forced to cut petrol/diesel prices in the next few months.
As a result, JM Financial has reduced the target price on HPCL to Rs 275 from Rs 300, BPCL to Rs 400 from Rs 450 and IOCL to Rs 85 from Rs 90.
In Q2, OMCs’ EBITDA is likely to decline QoQ to Rs 34,500 crore vs Rs 48,300 crore as marketing margins have started to get hit only from this month. July GMM is expected to be at Rs 9.2 per litre.
Company-wise, HPCL will see the sharpest decline in Q2 EBITDA given its leverage to the marketing business, Mittal said.
“Upside risk to crude price exists as we believe OPEC+ will continue to support Brent crude price above USD 75-80/bbl, which is the fiscal break-even crude price for Saudi Arabia, given their strong pricing power,” he said.
Livia Gallarati of Energy Aspects expects Brent prices to range between $90-$100 in the coming month.
“We are not expecting much above those levels, all factors remaining as they currently are, of course, higher oil prices as you say are inflationary which is not good news for governments particularly those with elections coming up as you mentioned. The United States has in the past tried to manage oil price increases by releasing SPR from their strategic government reserves. Unfortunately, they do not have a lot left in that reserve at the moment because of how much they used last year,” the analyst said.