Oil marketing companies eye higher savings by raising exposure to spot crude
New Delhi 21-Aug-2015
The move will help these firms take advantage of current slide in crude prices, which are under $50 per barrel.
The three state-owned oil marketing companies (OMCs)—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—are looking at additional savings, to offset lower refining margins, by increasing spot crude purchases in the current year. This will help them take advantage of the current slide in the price of crude oil, which has plunged below $50 per barrel.
The firms can expect to save close to Rs.2,000-3,000 crore or more this year if the price keeps falling. This will directly reflect in their profits, analysts said.
Last financial year, except for IOCL, OMCs did not increase their spot crude oil exposure significantly. While IOCL did not share a percentage of spot crude purchase, the other two were at a little less than 20%.
“As compared with last year, we have increased our spot crude purchases by more than 10% in the current year, and currently our total crude oil portfolio has close to 30% spot crude,” said P. Balasubramanian, director, finance, BPCL. He said the firm might look at increasing its spot crude purchases even further if the price of crude keeps sliding. The firm aims to take advantage of soft prices to the extent it can, he explained.
While the price of crude in the spot market always reflects the current market price, on a long-term basis, also called a term contract, the price of crude is usually calculated based on the average market price of the past three to six months. This makes crude oil dearer by at least $2-3 per barrel.
Essentially, to buy crude oil in the spot market, firms can pay the current market price but with term contracts they are stuck at a $2-3 per barrel higher purchase price. This adds up to a huge savings in the import bill for the OMCs when they shift partially to spot purchases, as the companies annually purchase close to 1,000 million barrels of crude oil every year.
Since the beginning of the current financial year, the benchmark Brent crude oil till July averaged $63 per barrel, but in August the price fell to below $50. As on Wednesday, the price of Brent crude was at $48.59 per barrel, according to Bloomberg.
“We are currently sourcing almost 30% spot crude oil for our Visakhapatnam refinery. We have the leeway to increase it for even the Mumbai refinery and we will look at it. Obviously, we want to leverage the fall in crude oil price this year,” said a senior HPCL executive who spoke on the condition of anonymity.
In its annual report released on Monday, IOCL mentioned that the company is trying to optimize its purchase costs by shifting to spot crude whenever possible. A mail sent to IOCL remained unanswered.
Analysts said a higher percentage of spot crude oil purchases in the current fiscal makes sense, as prices of crude oil are falling as are gross refining margins (GRMs)—the profit earned on processing each barrel of crude oil—unlike last year when the margins were strong.
“Last year, the companies were already in an advantageous position as price of crude oil had fallen by almost 50%. They were also getting the benefit of higher margins and their subsidy burden was coming down. Now the margins are at a low and are expected to fall even further, therefore all companies would look at taking advantage of the current crude prices to protect their bottomline,” said an analyst with a domestic brokerage. He did not wish to be named, citing company policy.
The three OMCs currently buy over 110 million tonnes of crude per annum. A benefit of $2-3 per barrel on 30% of this purchase can lead to a saving of between Rs.2,000-3,000 crore, he explained.
But this will not be enough to contain the fall in profits in the current and next quarter as a savings of $2-3 per barrel on 30% of crude oil volume purchased cannot offset the impact of an equivalent fall in GRMs on the entire volume processed.
“We believe OMCs will report a dismal Q2 FY16, given the softening in benchmark GRMs (down 30% quarter-to-date) and the oil price correction (down 13% quarter-to-date), resulting in heavy inventory losses,” said a 11 August report by brokerage Edelweiss Securities Ltd.
In the current fiscal, GRMs of OMCs have slipped from a high of $8.6 per barrel in the first quarter to $6.02 in the second quarter so far and are expected to fall further in the third quarter, the report said.
Balasubramanian explained that OMCs are still not in a buyers’ market. There are costs involved in processes such as transportation, and the quality of crude and inventory pile-ups. Therefore, a sustained portfolio of spot crude is one among many steps OMCs are taking to preserve their profits.
