Oil companies navigate a tricky path as rising crude prices squeeze margins. What lies ahead for them?
In August 2023, things didn’t go so well for oil marketing companies like Hindustan Petroleum, Bharat Petroleum, and Indian Oil Corporation. Their share prices took a significant hit.
Now, why did this happen? Let’s understand the reasons behind this drop in share prices of oil marketing companies.
Oil marketing companies are on a slippery note, especially in August 2023. To put it in numbers, from August 1, 2023, to August 31, 2023, the share price of Hindustan Petroleum dropped by a substantial 12.98%, Bharat Petroleum Corporation Ltd (BPCL) saw a 9.78% decrease, and Indian Oil Corporation’s share price went down by 5.21%.
So, what is causing this decline in these share prices? Well, the main reason is the rapid increase in crude oil prices.
The chart shows the rally in the prices of crude oil from June 13, 2023, to September 12, 2023
From the chart above, from June 13, 2023, to September 12, 2023, Brent crude oil prices went up by a whopping 22.66%. That’s a significant jump, from $74.07 per barrel to $90.86 per barrel. This sudden increase in Brent crude oil prices is because Saudi Arabia and Russia decided to keep supply cuts in place until December 2023.
Now, we all know that in any business, when the prices of raw materials tend to increase, the additional cost is transferred to the end customer or the end product. But are oil marketing companies transferring this additional cost to the end product? The answer is no.
Challenges Faced by Oil Marketing Companies
The main challenge for oil marketing companies is that even though the prices of Brent crude oil are going up, the prices we pay at the petrol pump have not changed much. In other words, retail fuel prices have stayed pretty much the same. This means that their profits get squeezed when oil marketing companies buy more expensive crude oil and can’t pass on those higher costs to customers.
Another factor contributing to their challenges is India’s special deal with Russia for discounted crude oil. However, those discounts have become smaller. The discount for Russian Urals or Russian crude went down from $25 per barrel in May to just $15 per barrel. After adding shipping and insurance charges, Indian refiners only get a $5 per barrel discount.
According to Moneycontrol, government-owned oil marketing companies are facing a tough time in the second quarter of the financial year 2024. With retail fuel prices remaining stable while crude oil prices go up, their profits are taking a hit because their gross marketing margins are shrinking.
There was a significant 45% drop in margins for petrol in the second quarter of 2023.
India’s crude oil imports from Russia dipped from 40% to 34% between April and July because we are not getting as much discounts as we used to, according to Jefferies India, as reported by Moneycontrol.
Additionally, for each $1 rise in oil barrel prices, there is a 50-point drop in per-litre gross marketing margins.
As crude oil prices are rising like no tomorrow, oil marketing companies will face the challenge of preserving their margins by hook or crook. It will be interesting to see what oil marketing companies do next.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The companies mentioned are for information purposes only. This is not an investment advice.