After Q3 gains, oil marketing companies to report big inventory losses in Q4

The OMCs aim to exhaust their inventories quickly and start reaping the benefits of lower crude prices as their fresh cargoes would start to arrive from April.

India’s oil marketing companies (OMCs) ,BPCL, HPCL & IOC  are likely to book heavy inventory losses in the March quarter of 2020, even as more than halving of crude prices since January 1 could positively impact their gross refining margins (GRMs). The OMCs are likely to see inventory loss of $5.6-8/barrel in Q4FY20 given that they bought crude at an average price of $65-$67 in the December quarter, according to analysts.

The OMCs had reported big inventory gains for the third quarter of the current fiscal ? Rs 1,608 crore by IOC and Rs 343 crore by HPCL. Industry experts estimated OMCs’ GRMs in Q4FY20-to-date at $1.0-3.9/bbl as Singapore refining margins improved around 5% sequentially. The refining margins were also aided by gains from refinery transfer price (RTP) being higher than spot price of $5.1-5.6/bbl. However, these gains will be more than nullified by the inventory losses in the quarter.

Industry sources said BPCL and IOC have around 13 and 39 days of inventory, respectively. The OMCs aim to exhaust their inventories quickly and start reaping the benefits of lower crude prices as their fresh cargoes would start to arrive from April.

Vidyadhar Ginde, oil and gas analyst at ICICI Securities, said IOC, in its Q3FY20 earnings call, indicated cost of its closing crude inventory was $67/bbl while Dubai crude is currently at $$34/bbl. “We estimate crude inventory loss for BPCL at $5.6/bbl, HPCL at $5.8/bbl and IOC at $8/bbl in Q4FY20 based on Dubai price of $34/bbl on 13-March 13.”

He further said IOC’s Q4 GRMs are also expected to be hit by Euro VI-related shut down. “IOC’s Mathura, Bongaigaon and Guwahati refineries took Euro VI related shutdown in Q4FY20. This is likely to reduce its auto fuels yield and hit GRM to that extent,” Ginde said.

If one assumes the average closing price of oil in Q3FY20 at $67 per barrel and the low of $34 then, given BPCL’s purchase of stocks in Q3FY20 of Rs 32,018 crore, the inventory losses for 13 days would be Rs 2,277 crore. As for IOC, the inventory loss could be Rs 7,297 crore given its inventory level.

Sumit Pokharna, vice-president and oil & gas analyst at Kotak Securities, said the OMCs, however, would have the benefit of higher marketing margins despite the Rs3/litre excise duty due to falling crude prices, besides getting the benefit of lower operating cost in the March quarter.

Crisil Ratings, in a report, said, Covid-19 is further drying up demand from the road transport and airlines segments in India as well. Hence, consumption growth of petroleum products is expected to be low at 2-3% in fiscal 2021. This, along with lower product prices, will have a direct impact on the revenue of OMCs.

gA sudden decline in crude prices will also lead to inventory losses for OMCs. Additionally, slowdown in global demand is putting pressure on product spreads, impacting gross refining margins. Both these factors will have a substantial impact on revenue growth and margins for downstream OMCs,” Crisil report said.