Soaring crude prices to hit PSU oil marketing companies profitability

High crude oil prices will weaken the profitability of the country’s three state-owned oil marketing companies (OMCs) – Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) – as they have limited flexibility to pass on higher raw material costs to consumers due to the forthcoming Lok Sabha elections in May 2024, according to a report by Moodys.

The report points out that the market margins of the three oil companies – the difference between their net realised prices and international prices – have already weakened significantly from the high levels seen in the April-June quarter of the current financial year.

Marketing margins on diesel turned negative since August while margins on petrol have narrowed considerably over the same period as international prices increased.

The earnings of the three OMCs, all of which enjoy a Baa3 stable rating, will weaken in the second half of fiscal 2024 if oil prices remain elevated at current levels of $85/barrel (bbl) – $90/bbl. Still, full-year earnings will remain comparable with historical levels at this price range, the Moody’s report states. The OMCs, however, will start incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around $100/ bbl.