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OMCs seeing silver lining beyond dark clouds
What’s Buzzing:
Oil marketing companies (OMCs) had previously taken a price hike on November 4. Post the event, crude prices have rallied ~40%, leading to negative profitability for the OMCs’ marketing segment and thereby correction in their stock prices.
Context:
At US$110 per barrel, the net marketing margin for OMCs was expected to reach negative Rs 10-13 for each litre of petrol/diesel sold at retail fuel stations. Further rally in crude oil prices, could widen losses for OMCs.
Our Perspective:
The profitability of OMCs largely comprises two segments (excluding inventory gain/loss) i.e. refining and marketing. While the profitability of the refining segment functions on the basis of spread between crude and petroleum product prices (simply called product cracks), the marketing segment earns a margin over international auto prices. While refining margins have largely remained strong (up 7% QoQ to US$6.6/barrel Q4FY22 YTD), the marketing segment has been a laggard (no hike in retail auto fuel prices, in spite of rising international prices) due to the volatile geopolitical situation and in view of assembly elections (as per media reports). Petrol and diesel together contribute 50-55% of marketing segment sales. Its cost recovery remains key to continued profitability of the consolidated entity.
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