Recovering demand for petroleum products is supporting the profitability of India’s oil marketing companies, Fitch Ratings said.

The ratings agency cited the sustained strength of marketing margins (MM) and recovering demand for petroleum products is supporting the profitability of OMCs against weak gross refining margins (GRM).

The trend, thereby, lowers the downside risks for OMCs credit metrics, it said.

“Petroleum product sales at Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation surged by 22-23 per cent in the third quarter of the financial year ending March 2021 (3QFY21) from the previous quarter, with domestic transportation fuel demand recovering to near normal levels, barring aircraft fuel, and MMs on auto fuel sustained at above pre-pandemic levels.”

However, reported GRMs dropped due to lower inventory gains and the improvement in underlying GRMs was limited by weakening product cracks and increasing crude oil prices.

“IOC reported a 3QFY21 GRM of USD 2.2 per barrel versus USD 8.6 in 2QFY21, BPCL reported USD 2.5 versus USD 5.8 and HPCL reported USD 1.9 versus USD 5.1.”

“However, core GRMs excluding inventory gains were lower at USD 1.2 for IOC, USD 1.2 for BPCL and negative USD 1.0 for HPCL.”

According to Fitch Ratings, the above long-term average MMs from FY22, which should aid GRMs in the short term, partly to recover past refinery investments and fund new investments over the medium term.

“GRMs are likely to rise to around USD 3.7-4 per barrel in FY22 from USD 2.0-2.5 in FY21 on a better demand-supply balance as the economy recovers.”

“We believe the Central or state governments may reduce fuel taxes to support affordability if crude oil prices remain at around USD 60/barrel or continue to rise.”

Besides, the capacity to reduce taxes would be supported by the recovery in fuel sales and other government income sources, like the GST, to almost pre-pandemic levels.

“We believe state interference in fuel prices, if any, would be temporary and limited, as it could affect the government’s plan to divest BPCL.”