OMCs recovered losses from 2-year freeze on fuel rates with combined profit of ₹69,000 crore in FY24

India's three major state-owned oil marketing companies (OMCs) Indian Oil Corporation (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) posted a combined net profit of ₹69,000 crore in the current financial year till the October-December quarter (Q3FY24). 

The OMCs have recouped losses registered in 2022 over frozen retail prices of petrol, diesel rates after international crude oil prices soared to a 14-year mark with Brent hitting $140 per barrel in March 2022 due to the Russia-Ukraine war-led spike. 

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OMCs losses registered in 2022

The state-run refiners registered a combined net loss of ₹21,201.18 crore during April-September 2022 despite accounting for ₹22,000 crore announced but-not-paid liquified petroleum gas (LPG) subsidy for the previous two years.

The fuel price freeze that began on April 6, 2022, had a loss as high as ₹17.4 a= per litre of petrol and ₹27.7 per litre of diesel for the week ended June 24, 2022. However, subsequent softening led to losses being eliminated. The three firms had a margin of ₹11 per litre on petrol and a loss of ₹2-3 per litre on diesel.

A subsequent softening of international oil prices and the government giving out LPG subsidies supported IOC and BPCL to report annualised profit for 2022-23 (April 2022 to March 2023), however, HPCL was in the red.

The three oil majors, which control roughly 90 per cent of India's fuel market, had 'voluntarily' not changed petrol, diesel and cooking gas or LPG prices for almost two years, resulting in losses when input costs were higher and profits when raw material prices were lower. The freeze on fuel rates was finally lifted today at 6:00 am as the central government announced on Thursday that a hike of ₹2 pe litre on petrol and diesel will be implemented starting from March 15.

In the national capital Delhi, the retail price of a litre of petrol and diesel will both dropped by ₹2 to ₹94.72 and ₹87.62 respectively, the oil and petroleum ministry said in a post on social media platform X.

OMCs back to profit in FY24 (So far!)

The OMCs reported a remarkable turnaround in the current fiscal year with IOC, BPCL, and HPCL posting record earnings in the first two quarters (April-June and July-September) when international oil prices - against which domestic rates are benchmarked - almost halved to $72 per barrel from a year ago.

‘’The three oil marketing companies reported healthy operating margins in H1 FY24, recouping the losses incurred during FY2023. The aggregate operating profitability of the OMCs was ₹90,000 crore in H1 FY2024 against a loss of ₹14,600 crore in H1 FY2023,'' said Girishkumar Kadam, senior vice president and group head, of corporate ratings, ICRA Ltd.

International prices rose again in the subsequent quarter to $90, leading to a moderation of their earnings. Brent crude prices are now hovering in $83-85 per barrel range. However, earlier today OMC stocks plunged by around eight per cent, posting their worst session in two years after the reduction in fuel prices. 

International crude prices also hit a five month high with Brent hitting $85 per barrel mark on Thursday after the International Energy Agency (IEA) predicted a tighter market in 2024 and also after Ukraine's attack on Russia's refinery posed supply disruptions. High crude oil prices is a negative for OMCs as they purchase raw crude.

What lies ahead for OMCs?

The OMCs are projected to achieve a gross marketing margin of ₹5 per litre on petrol and ₹1 per litre on diesel, said domestic brokerage firm Prabhudas Lilladher. Considering a marketing cost ranging from ₹1.8 to ₹2 per litre, the brokerage anticipates that they would incur a loss on diesel, all else being equal.

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OMCs made a GMM of ₹7.8 per litre on petrol and ₹5.3 per litre on diesel, during the fortnight ended March 14 2024 --prior to the fuel rate cuts. Although marketing margins have historically exhibited volatility, the OMCs have been profiting from what many consider the ‘Golden Age of Refining’, according to Prabhudas Lilladher.

This notion suggests that, as a sunset industry, GRMs would continue to be high due to inadequate global capacity expansion. In the short term, with some Russian refineries operating below capacity due to the ongoing conflict, PL anticipates that GRMs will stay elevated. However, looking ahead, the brokerage foresees a market glut over an extended period.

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