IOC’s refining margins squeezed
New Delhi   11-Aug-2011

The IndianOil (IOC) stock gave up some recent gains on Wednesday, falling 3.5% to Rs. 326.35, as its June quarter financial results were announced.

Recently, stocks of oil marketing companies (OMCs) have outperformed the broader market on account of lower crude oil prices amid concerns of a global slowdown. The Organization of the Petroleum Exporting Countries, too, has cut its demand growth forecast.

This could mean that oil prices are likely to remain subdued in the near term. That’s good news for the Indian state-owned OMCs, which incur losses (or under-recoveries) due to selling fuel below the market price.

But under-recoveries for this fiscal are still likely to be high, considering that they were estimated at about Rs. 44,000 crore in the first quarter itself. Though, towards June-end, the government increased prices of diesel, kerosene and LPG, which is expected to reduce the overall under-recoveries.

However, according to Centrum Research estimates, total under-recoveries for this fiscal year, assuming oil prices average at $97 per barrel (at a rupee-dollar exchange rate of 46) would be about Rs. 97,000 crore. That is higher than the total under-recoveries of Rs. 78,000 crore in fiscal 2011.

Of course, it all depends on how oil prices shape up for the rest of the year. Nevertheless, the softening in crude prices does give OMCs some breathing space.

Meanwhile, IOC’s losses at the net level increased compared with a year ago, while operating losses were lower. A sharp increase in interest expenses spoiled the show at the net level.

What’s more worrisome is that gross refining margins (GRMs) came in lower at $4.71 per barrel compared with the $7.9 reported in the March quarter. This has happened at a time when the benchmark Singapore GRMs have improved sequentially.