Oil companies to turn profitable on fuel marketing in FY24: Fitch
According to Fitch Ratings, state-owned oil marketers in India are expected to return to profitability in the current fiscal year ending on March 31, 2024, after incurring significant losses in the previous year. The rating agency’s assessment is based on several factors, including the projected growth in India’s petroleum product demand and the overall economic outlook.
Fitch Ratings forecasts that India’s petroleum product demand will experience mid-single-digit percentage growth in the medium term. This growth is expected to be supported by various factors, including the anticipated GDP growth rate of 6-7% in the coming years. A growing economy typically translates to increased energy consumption, including demand for petroleum products.
Additionally, the Indian government’s focus on infrastructure development and increased spending in this sector is expected to contribute to the growth in petroleum product demand. Infrastructure projects, such as transportation networks and industrial facilities, often rely heavily on energy resources, including fuels, thereby driving demand for petroleum products.
Furthermore, Fitch Ratings expects a pick-up in industrial activity, which is likely to further bolster the demand for petroleum products. Industrial sectors such as manufacturing, construction, and mining heavily depend on fuels for operations and transportation, making them key contributors to the overall demand for petroleum products.
Considering these factors, Fitch Ratings anticipates that state-owned oil marketers in India will witness a turnaround in their financial performance, moving from losses to profitability in fuel marketing. The projected growth in demand, coupled with improved economic conditions and increased industrial activity, provides a favourable environment for these companies to generate revenue and improve their financial outlook.
However, it is important to note that various factors, including global crude oil prices, government policies, and regulatory changes, can influence the fuel marketing landscape. These factors can impact the profitability and performance of oil marketers in India. Therefore, close monitoring of market dynamics and effective management strategies will be crucial for sustained profitability in the fuel marketing sector.
According to Fitch Ratings, the marketing segment of Indian oil marketing companies (OMCs) is expected to return to profitability in the financial year ending in March 2024 (FY24). This projection assumes that crude oil prices will decrease to Fitch’s estimated level of USD 78.8 per barrel. The anticipated decline in crude oil prices follows significant losses incurred by OMCs in the previous financial year (FY23) due to high crude prices and unchanged retail fuel prices.
Fitch Ratings expects that the fall in crude oil prices will enable OMCs to partially recover the losses incurred in FY23 during the first half of FY24. The recent decline in crude oil prices is expected to eventually reflect in retail fuel prices, thereby providing some relief to OMCs.
The profitability of OMCs is closely tied to the dynamics of global crude oil prices. When crude oil prices are high and retail fuel prices remain the same, OMCs face higher input costs without being able to pass on the full burden to consumers. This results in margin pressures and potential losses for the marketing segment of OMCs.
However, with the anticipated decrease in crude oil prices and the assumption that retail fuel prices will eventually reflect this decline, OMCs are expected to see an improvement in their financial performance. Lower input costs combined with increased revenue from retail fuel sales at adjusted prices should contribute to the recovery and profitability of the marketing segment.
It’s important to note that the actual performance of OMCs will depend on various factors, including the volatility of global crude oil prices, domestic fuel pricing policies, and market competition. OMCs will need to effectively manage their pricing strategies, operating efficiencies, and cost structures to navigate the dynamic market conditions and sustain profitability.
Overall, Fitch Ratings’ outlook suggests a potential recovery for the marketing segment of Indian OMCs in FY24, driven by the expected decrease in crude oil prices and the subsequent adjustment of retail fuel prices. However, continued vigilance and adaptability will be essential for OMCs to capitalize on these favourable conditions and mitigate potential risks in the future.
The government had previously allowed state-owned oil retailers, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), to recover their losses in subsequent periods, following the suspension of daily price resets. Despite the increase in crude oil prices, these companies did not raise petrol and diesel prices last year. However, with the recent decline in oil prices, they are now in the process of recouping their losses.
Fitch Ratings expects India’s petroleum product demand in the financial year ending in March 2024 (FY24) to experience mid-single-digit percentage growth. This follows a 10% rise in demand in FY23, which was supported by pent-up demand after the pandemic-related restrictions were eased.
The anticipated growth in petroleum product demand is driven by several factors. Firstly, Fitch expects the Indian economy to grow at a rate of 6-7% in the coming years, which will contribute to increased industrial activity and energy consumption. Additionally, the government’s focus on infrastructure development and increased spending in this area will boost demand for petroleum products. These factors combined with the gradual recovery of the economy from the impact of the pandemic, are expected to drive the growth in petroleum product demand.
It is worth noting that the actual growth in demand will depend on various factors, including economic conditions, energy policies, and consumer behavior. While the post-pandemic pent-up demand has supported growth in recent years, sustained and consistent economic growth will be crucial for the long-term demand for petroleum products.
Fitch Ratings expects the state-owned oil retailers to benefit from the receding oil prices and recover their losses. The anticipated growth in petroleum product demand in FY24 reflects the gradual recovery of the Indian economy and the government’s efforts to boost infrastructure development. However, the actual performance will depend on market dynamics, regulatory measures, and the ability of oil retailers to manage their operations effectively in a volatile environment.
Fitch Ratings expects India’s gross domestic product (GDP) to grow at a rate of 6-7% in the next few years, which will contribute to the medium-term growth in petroleum product demand. This growth is supported by the government’s increasing infrastructure spending and a pick-up in industrial activity. As the economy expands, the demand for energy and petroleum products is expected to rise.
In terms of gross refining margins (GRMs), Fitch anticipates a moderation in FY24 compared to the record-high levels observed in FY23. The easing of tight industry conditions is expected to contribute to this moderation. However, Fitch still expects the FY24 GRMs to remain above mid-cycle levels. Factors contributing to this expectation include increasing demand following China’s reopening after the pandemic and uncertainty surrounding Russia’s transportation fuel supply.
The normalization of product spreads in recent months has led India to discontinue the special excise duties on exports of diesel and aircraft turbine fuel. These duties were imposed in July 2022. The discontinuation reflects the evolving market dynamics and the adjustments made by the Indian authorities to align with changing industry conditions.
Overall, Fitch Ratings expects the growth in GDP, the government’s infrastructure spending, and the pick-up in industrial activity to drive the medium-term demand for petroleum products in India. The moderation of gross refining margins in FY24 is expected, but the levels are projected to remain above mid-cycle. The discontinuation of special excise duties on fuel exports reflects the changing market conditions. However, it is important to note that these projections are subject to various factors and uncertainties, including economic developments, energy policies, and geopolitical factors that can influence the demand and supply dynamics in the petroleum market.
The normalization of product spreads in the petroleum market has resulted in India discontinuing the special excise duties on diesel and aircraft turbine fuel exports imposed in July 2022. This decision reflects the changing dynamics and market conditions, indicating a more balanced supply-demand situation.
Fitch Ratings expects crude oil prices to moderate from the high levels seen in FY23 but remain elevated. This is anticipated to support robust cash flow generation for upstream producers like Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) in FY24. The benchmarking of entities’ gas realizations to 10% of Fitch’s crude price assumptions, within the floor price of USD 4 per million British thermal unit and ceiling of USD 6.5, is based on India’s new gas pricing regime for legacy fields. This approach is aimed at reducing cash flow volatility for these entities.
By aligning gas realizations with crude price assumptions, the cash flow volatility for ONGC and OIL is expected to be mitigated. This provides greater stability and predictability in their cash flow generation, which is crucial for their financial performance and investment decisions. The new gas pricing regime and the focus on reducing cash flow volatility will help support the financial resilience of upstream producers in India.
However, it’s important to note that crude oil prices are influenced by various factors, such as global supply and demand dynamics, geopolitical events, and economic conditions. The projections made by Fitch Ratings are based on their assessment of these factors, but there is inherent uncertainty in forecasting future oil prices.
Fitch Ratings expects capex intensity to remain high in the Indian oil and gas sector. Reliance Industries Ltd is investing in its oil-to-chemical, new energy, and digital businesses. Upstream producers, such as ONGC, will focus on enhancing production from mature fields and maintaining adequate reserves. Oil marketing companies (OMCs) will expand their refining, petrochemical, and retail network capacities. Additionally, green capex, aimed at sustainable and environmentally friendly projects, is expected to increase gradually in the sector over the medium term.
In terms of crude oil production, Fitch expects it to stabilize in FY24 due to investments in technology by ONGC to raise recovery and tap into isolated reservoirs. ONGC’s enhanced oil recovery and field development projects, including the fifth phase of the Mumbai High project, support its production targets. However, in FY23, India’s crude oil production fell by 1.7%, primarily driven by a 1% decline from ONGC, which offset a 5% rise from Oil India Limited (OIL).
Fitch anticipates India’s crude oil import dependence to continue rising in FY24 due to strong demand for petroleum products and stable domestic crude oil output. In FY23, India’s crude oil imports increased by 10%, and the reliance on imported crude reached 87.3% of total demand, up from 85.5% in FY22. The mix of India’s oil suppliers has changed, with Russia’s share of Indian oil imports rising to 37% by April 2023 from less than 2% in March 2022.
Regarding natural gas production, Fitch expects an increase in FY24, supported by a rise in Reliance Industries’ production and ONGC’s development projects on both the western and eastern coasts. Reliance Industries is expected to increase its gas production from 19 million standard cubic meters per day (mmscmd) in FY23 to 24 mmscmd in FY24. The growth in supply will be further aided by ONGC’s gradual ramp-up in production at its KG-D5 offshore deep-water field. In FY23, India’s domestic gas production grew by 1% despite high prices under the previous pricing regime, driven by strong demand from city gas distribution (CGD) companies.
Fitch predicts mid-single-digit growth in overall gas consumption for FY24. India’s imported LNG dependence is expected to remain stable after falling to 44% of demand in FY23, as both domestic and imported gas volumes are expected to increase commensurately.
