Oil Marketing Companies (OMCs) gaining better market margins recently as crude oil prices drop

State-run oil marketing companies (OMCs) are expected to see significant gains in profitability due to a decline in crude oil prices while product prices remain stable. Brent crude has averaged lower in September than in August, contributing to better marketing margins. However, a potential cut in retail fuel prices could limit these gains.

OMCs are benefiting from the drop in crude oil prices because their production costs have decreased, while retail fuel prices remain largely unchanged. This allows them to retain higher profit margins on petrol and diesel sales. With crude costs lower but fuel prices steady, OMCs are seeing improved marketing margins, despite reduced refining margins. This pricing difference is boosting their overall profitability.

Crude oil prices have fallen about 20% since April’s high of over $90 per barrel, primarily due to subdued demand from China and expectations that Opec+ will reverse voluntary production cuts by December.

Despite the drop in refining margins due to lower crude prices, OMCs are benefiting from improved marketing margins. Gross margins on petrol and diesel in the September quarter have surged to Rs 7.3 per litre and Rs 5.2 per litre, respectively, compared to Rs 3.9 and Rs 3.5 in Q1FY25. However, the retail fuel prices have also been seeing a moderate rise of around INR 2 per litre. If the retail fuel prices further extend from this range, the margins currently being enjoyed by the OMCs may then be mitigated.

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OMCs are also focusing on long-term growth through investments in petrochemical capacities. Indian Oil Corp. is building a Rs. 61,000 crore petrochemical complex, while Bharat Petroleum and Hindustan Petroleum are planning significant capex projects. Though these initiatives will take time to impact performance, they are expected to reduce the companies’ exposure to oil price volatility in the future.