OMCs integrated margins will continue to increase from FY21 levels

Oil Marketing Companies' integrated gross margins are trending above Rs. 5 per liter due to the recent drop in oil prices. This is trending higher than the FY22 levels and is comparable to the margins they experienced during FY21 levels (volume-adjusted). 

The gross refining margin for Singapore is $ 3 per barrel, but when export taxes are considered, it is $ (2.2) per barrel. Based on current prices, the retail margins for gasoline and diesel are Rs. 13.7 per liter and Rs. -1.5 per liter, respectively. Based on current pricing trends, the liquified petroleum gas earnings margin, which is currently at Rs. 41 per cycle, is expected to rise to more than Rs. 100 per cycle.

Based on current Saudi Propane contract prices, it is anticipated that the retail liquified petroleum gas cylinder earnings margin in October will rise to Rs. 64 per cylinder (from Rs. 41per cylinder in September) and further to Rs. 100 per cylinder in the following month. The industry's normalized earnings increase by about 6% for every Rs. 20 per cylinder. While propane prices spike every winter, the current futures curve does not predict an increase. Due to lower naphtha prices, this is probably because petrochemical demand is weak. The government will likely pay back past under-recoveries that oil marketing companies incurred over the previous three quarters, totaling almost Rs. 250 billion.

The government has received Rs. 170 billion in windfall taxes since July, which is enough to pay for this compensation.

Oil marketing companies are probably partially making up for the losses in gasoline and diesel due to a recent increase in aviation fuel price margins. Similar to how the industry's lubes margin had suffered during the previous quarter, probably as a result of higher oil prices, it should start to improve from the current quarter.

The most likely scenario is for crude to remain benign in order for these margin improvements to continue. Due to a decline in demand in the US and EU, 4QCY22 is probably going to have the lowest year-on-year demand growth for the entire year. While the amount of Russian crude that will be disrupted in December 2022 is probably only going to be around 0.5 million barrels per day, China's demand may still be weak if Covid-19-related lockdowns continue.

On the refining front, margins have decreased due to the potential release of China's export quotas, off-season demand, and an extremely high global refining operating rate. But the structural outlook for the refining cycle is still favorable. However, since Russian product exports are likely to continue through the winter and Chinese exports may increase due to new quotas, seasonal demand is unlikely to increase margins.