OMCs stare at end of super normal marketing margin

For oil marketing companies (OMCs) such as Indian Oil Corporation (IOCL), BPCL, and HPCL the days of super normal marketing margin are nearing end after the government announced one of the steepest hikes in duties on petrol and diesel in the recent past, by raising it by Rs 10 and Rs 13 per litre, respectively, in a notification issued late on Tuesday.

OMCs are expected to witness a significant erosion in the earnings during the January-March quarter of FY20 even though low crude and product prices jacked up their margins on the sale of petrol and diesel.
That’s because of sharp decline in crude oil prices. It is expected that the OMCs would report large inventory loss of Rs 33,100 crore in January-March quarter of FY20. This would result in sharp erosion in earnings that would push the companies into the red again.

Currently, the OMCs are enjoying highest-ever marketing margin on sale of petroleum products at Rs 13.5 per litre. This is because fall in refinery transfer price (RTP) by Rs 8.55-12.6 per litre since March 16, 2020 has not been passed on to consumers.
Companies make inventory losses in a falling market as the cost of the inventory in the form of crude and products is higher than the prevailing prices.

Lockdown enforced to stem Coronavirus or the COVID-19 outbreak is leading to lower demand.
Though, the crude oil price have slumped but OMCs are unable to pass on benefits to consumers as the government has raised duties to fund its social benefit schemes.
Higher duties are likely to impact sales volume by 10%, though the government’s revenue to increase by Rs 1.4 lakh crore in FY21. Total retail sales of petrol/diesel were 41/103 bn ltrs in FY20.

On the other hand, OMCs will struggle to sustain higher gross marketing margin on petrol/diesel.
The latest duty hike of Rs10/13/ltr is too steep and without any price hike at retail level, marketing margin would come down. Further, crude oil price also increased 13% yesterday and hovering at above US$31/bbl.
With lower GRMs, lower volume and lower marketing margins, OMCs will continue to feel pressure in the near term.

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