With coronavirus lockdowns pummelling fuel demand in India, Fitch Ratings expects the marketing and refining volume of state-owned oil firms to fall by more than 15 per cent in the current fiscal year before a gradual recovery in 2021-22.

“Pent-up demand and the upcoming festival season may support fuel sales in 3QFY21 (October-December), but a sustainable recovery would be subject to risks from the continuing spread of the coronavirus hindering mobility and economic activity,” Fitch said in a note.

India’s fuel demand recovered sharply in June from April before slowing due to the reimposition of restrictions in certain cities because of coronavirus and flooding in some regions.

Fitch expects gross refining margins (GRMs) to remain under pressure from weak product demand and crack spreads in the near term until the global economy recovers significantly from the coronavirus crisis.

“We expect the FY21 marketing margins of oil marketing companies (OMCs) to widen from FY20, driven by exceptionally high margins in 1QFY21 when the fall in crude oil prices was not fully passed on to consumers and prices rose to partly cover investments to comply with new emission standards,” it said.

It expected marketing margins to normalise from FY22 to below the FY21 level, but remain higher than that of FY20.

“The government may require OMCs to cut marketing margins to keep retail fuel prices affordable if crude oil prices continue to rise,” it said. “However, state interference in fuel prices, if any, will have a bearing on its plans to divest Bharat Petroleum Corp Ltd (BPCL), which we believe will limit any drastic steps.”

GRMs of BPCL, Indian Oil Corp (IOC), Hindustan Petroleum Corp Ltd (HPCL) and Reliance Industries Ltd fell sharply in April-June due to weak industry conditions and inventory losses.

“The FY21 profitability of upstream oil and gas companies like Oil India Ltd and Oil and Natural Gas Corp is likely to weaken on lower oil and gas prices and muted production growth, mitigated by a fall in oil price-linked statutory levies,” Fitch said.

The rating agency expected OMCs to defer and potentially re-evaluate the feasibility of large new refining projects in light of the uncertain industry outlook, while investments in marketing infrastructure would continue.

“However, upstream oil and gas companies may have less flexibility to cut capex due to mandated timelines for the completion of exploration work at oil blocks and India’s energy deficit,” it added.