Oil Shock Looms: OMCs Set for Massive Losses in Q1 Amid West Asia Crisis-Driven Crude Price Volatility

Oil Shock Looms: OMCs Set for Massive Losses in Q1 Amid West Asia Crisis-Driven Crude Price Volatility​

State-run oil marketing companies (OMCs) are bracing for significant financial stress in the first quarter of this fiscal year. They are expected to report substantial losses, primarily driven by mounting marketing costs and extreme volatility in global crude prices due to the ongoing tensions in West Asia.

Kotak Institutional Equities estimates that OMCs will face a combined pre-tax loss amounting to ₹62,000 crore. Government projections of these losses are even higher, putting the figure closer to ₹75,000 crore. The analysts caution that while gross refining margins may appear elevated in some areas, adverse losses resulting from inventory procurement amid subsequent price declines will be a major factor for OMCs.

Impact on Key Oil Marketing Companies (OMCs)​

The operational performance of individual OMCs is expected to vary significantly. Equirus Securities anticipates HPCL to be the most severely affected, projecting an EBITDA loss of ₹16,200 crore, which reflects its higher marketing-to-refining skew. Indian Oil is expected to incur an EBITDA loss of ₹13,500 crore, while BPCL is projected to report an EBITDA loss of ₹10,900 crore for the quarter.

ICICI Securities provided a granular view of performance metrics. They estimated that OMCs sustained a diesel loss of ₹18.9 per litre and a petrol loss of ₹6 per litre during April-June. This contrasts sharply with positive margins of ₹8 on diesel and ₹10 on petrol recorded in the previous year's quarter. The losses were primarily attributed to a fundamental mismatch between fluctuating international fuel prices and the largely stable domestic pump prices.

Market Dynamics: Margins and Operational Challenges​

The financial health of OMCs is intrinsically linked to market forces. Analysts noted that OMCs incurred significant losses in April-May due to elevated benchmark prices, increased premiums, high logistic costs, a weakening rupee, and delays in retail price hikes.

However, the situation has seen dramatic shifts recently. The hike in retail fuel prices at the end of May, coupled with a sharp decline in oil prices, has restored supernormal margins for both petrol and diesel within the sector. JM Financial provided context on margin recovery, stating that OMCs previously earned a normalised margin of ₹12.4 per litre when the landed Brent price was $70 a barrel (pre-Iran crisis). Currently, they earn a normalised margin at a landed Brent price of $95, bolstered by both a ₹10 per litre excise cut and a ₹7.5 per litre fuel price hike.

Upstream Sector Performance Tracking Crude Trends​

The upstream segment is showing signs of strength. Kotak expects ONGC’s EBITDA to increase by 66 percent year-on-year, while Oil India's EBITDA is projected to see a remarkable 98 percent rise, based on a lower operational base.

Global Crude Price Volatility: A Rollercoaster Ride​

The oil market experienced intense volatility during the April-June period, with price action being intensely dictated by developments in the West Asia conflict—a sequence involving extreme escalations followed by an unstable, brief ceasefire.

Brent crude, serving as the global benchmark, exhibited major swings. It briefly dropped to around $90 on April 17 following the announcement of a temporary ceasefire between the US and Iran. Yet, fears of renewed hostilities propelled prices up to a four-year high of $126.41 by April 30. The monthly average for Brent crude during this period was approximately $117 a barrel.

The trajectory continued through May and June. Crude prices remained above $110 in the first half of May before falling to $92.05 by month-end, spurred by optimism regarding peace. In June, prices slipped further, averaging $85 a barrel. The market is currently highly volatile as the ceasefire collapses amid heavy missile and drone strikes involving both the US and Iran, with Brent hovering between $76 and $79.50 a barrel.