OMC marketing margin squeezed as crude rises

NEW DELHI:  India’s oil marketing companies (OMC) have had a dream run over the past three quarters as far as their gross marketing margins are concerned. The sharp fall in crude oil prices over the summer due to the Covid-19 pandemic and the decision by the companies to hold retail prices unchanged citing demand destruction left them with record high marketing margins for the larger part of the previous year. 

However, the recent rise in crude prices over the past few weeks and already record-high fuel prices have forced gross marketing margins below the ideal Rs 3 per litre for the first time this financial year. “Retail auto fuel prices in India have reached all-time highs, thus restricting gross marketing margins to Rs 1.7-2.7/lit (v/s Rs 4.5-5 per litre in 3QFY21).

However, gross marketing margins in FY21 till date still average Rs 6.5-7/lit (well above the long-term average of ~Rs 3/litre),” Motilal Oswal Financial Services said in a report recently.  However, this is unlikely to be a long-term problem for OMCs, analysts say. According to experts, crude oil prices are expected to hover in the range of $50-60/bbl as production from the US increases and OPEC+ production normalizes. 

They also do not expect excise duties—already at record highs—to be increased even further by the Centre.“In fact, the government has intervened at instances when retail prices have peaked. Thus, there is room to lower the excise duty from current levels if crude oil prices rise... 

We model gross marketing margins at Rs 3.3 per litre for petrol and diesel over FY22-23E,” analysts from Motilal Oswal noted in their recent research report, adding that “as crude oil prices stabilize, oil marketing companies would raise their gross marketing margins.”