NEW DELHI: The wild plunge in crude oil prices is likely to result in India's oil marketing companies taking on inventory losses worth Rs 25000 crore for the quarter ended March 31.
According to a Crisil Ratings analysis, the 70 per cent drop in crude oil prices over the course of the quarter had brought average crude oil prices down from $55 per barrel in February to just $20 per barrel by the end of the quarter. "This has caught refiners on the wrong foot," noted Crisil directors Sachin Gupta and Nitesh Jain.
In the normal course, refiners keep an inventory of 20-50 days of crude on average to avoid disruptions. India’s total refining capacity currently stands at around 250 million metric tonne per annum. With market prices crashing, this reserve of crude oil bought when values were much higher is likely to lead to refiners taking an inventory loss of $10-20 per barrel.
Inventory loss or gain is the difference between the present value of crude oil on the market and the cost at which the stock was bought. While these losses will be offset once prices rebound, the process would take time, the agency warned.
"Inventory losses would be more for refineries located away from the coast because they have to stock crude oil for longer periods. That means refiners will have to borrow more working capital to fund the crude oil purchased earlier," noted Gupta, Senior Director, CRISIL Ratings.
The collapse in fuel demand following the lockdown is also expected to result in heavy declines in refiners’ gross refining margins -- the amount of money earned by the refiner for refining crude oil into final products.
"With demand culled further because of the extension of nationwide lockdown up to May 3, 2020, refineries are staring at a halving of utilisation during the April-June quarter. Refineries that replenished their products inventory are staring at significant curtailment of operations," Crisil noted.
This is set to see refining margins on high-yield products such as aviation turbine fuel, petrol and diesel remaining weak over the near term.
"However, oil marketing companies would fare better than standalone refiners because of higher marketing margins for some products. For example, retail prices of petrol haven't fallen in tandem with crude oil prices, which implies higher marketing margins," the agency noted.
But, Jain also added that lower throughput and margins will hurt the credit metrics of oil refiners.