Higher than usual imports of Russian oil at significant discounts to market prices may limit near-term working capital needs of fuel retailers IOC, BPCL and HPCL, Fitch Ratings said on Tuesday.
State-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) haven't changed the retail selling price of petrol, diesel and cooking gas LPG in line with cost over the past few months. They incur losses on fuel marketing, which are being offset by gains from other areas such as higher refinery margins from processing cheaper Russian crude.
Fitch said rising global demand and tightening supply for refined products support refining margins, and oil companies' marketing margins recover gradually.
"Higher-than-usual imports of Russian oil at significant discounts to market prices may also limit the OMCs' near-term working capital needs," it said.
This follows weaker metrics in FY22 as marketing losses pressured EBITDA and rising crude oil prices increased working capital requirements, offset partly by inventory gains.
"We expect petrol and diesel retail prices in India to remain aligned with the movement in crude oil prices over the medium term, despite sporadic periods of constant retail prices amidst heightened volatility in oil prices," the rating agency said.
This, it said, should drive a gradual improvement in the marketing margins of oil marketing companies (OMCs) over the rest of FY23 (2022 to 2023), albeit to levels lower than normal.
However, if crude oil prices are sustained beyond base-case assumptions in 2022, then record-high retail fuel prices may limit the extent to which the changes are passed on, pressuring OMCs' credit metrics, it said.
The three fuel retailers paused daily revision in petrol and diesel prices when five states, including Uttar Pradesh, went to the polls last year. They again hit a pause button after raising rates by Rs 10 per litre reach for a fortnight period starting end-March.
Crude oil price (from which petrol and diesel are made) soared from $84 per barrel to a near 14-year high of $139 in early March before paring some gains. It is trading at $119.
Fitch said it expects lower refined product exports from China, disruption in product flows from ongoing geopolitical tensions, and increased uptake of middle distillates for power generation to maintain the tight demand-supply for petroleum products in Asia in the near term.
However, the current highs in refining margins should moderate over the medium term as new capacities ramp up and supply side issues improve.
"We believe that high crude oil prices, the recent 110 per cent increase in natural gas prices by the Indian government, and our expectation of a further increase in gas prices in the next reset in October 2022, will boost the FY23 profitability of ONGC and OIL and support their investment spending and shareholder distributions," Fitch added.