New Delhi : For oil refiners, the Covid-19 pandemic seems to have delivered a dual blow — big inventory loss in the January-March quarter and a likely plunge in gross refining in the subsequent three months.
According to Crisil Ratings, Indian oil refiners may make inventory loss of over Rs 25,000 crore in the January-March quarter because of 70 per cent fall in crude oil prices. The likely plunge in gross refining margins would follow (GRMs) in the first quarter (April-June) of Fy21 because of demand destruction.
Crude prices nosedived from an average $55 per barrel in February to $33 in March and closed at around $20 end of March as demand slumped because of the pandemic. On April 12, OPEC+2 reached a deal for a record production cut of 9.7 million barrel a day. Yet crude prices have hovered low because of the pandemic-induced plunge in demand across the globe.
“It has caught refiners on the wrong foot,” the rating agency said in its report on the oil sector.
India has 250 million tonne per annum refining capacity and refiners keep inventory of 20-50 days of crude to a void disruption in operations. The rapid fall in crude oil prices means inventory loss of $10-20 per barrel. The final figure of inventory loss will be estimated based on the price prevailing on March 31, 2020.
This loss could be offset only once the crude oil prices rebound, but going by current market dynamics the slump in global demand is expected to prolong.
“Inventory losses would be more for refineries located away from the coast because they have to stock crude for longer periods. That means refiners will have to borrow more working capital to fund the crude oil purchased earlier,” said Sachin Gupta, Senior Director, Crisil Ratings.
In addition to inventory losses, the operating performance of refiners is expected to remain weak in the first quarter of FY21 due to lower volumes and lower GRMs.
With demand culled further because of extension of lockdown up to May 3, refineries are staring at halving utilisation during the April-June quarter. Refineries that replenished their products inventory are staring at significant curtailment of operations.
“Our base-case assumes the lockdown lasting for up to 1.5 months, with another 1-1.5 months required to resume and stabilise operations. Additionally, refining margins on high-yield products, such as aviation turbine fuel, motor spirit and high-speed diesel, have plummeted and are expected to remain weak over the near term. That will affect the operating metrics of refiners,” it said.
But oil marketing companies are expected to 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 rates, which implies higher marketing margins.
Nitesh Jain, Director, Crisil Ratings, said, “Lower throughput and lower margins resulting from suppressed demand outlook will hurt the credit metrics of oil refiners. Though strong government/parent support will lend a shoulder, and continue to support the overall credit profiles of refiners. Revival in demand and improvement in GRMs will be key monitorables in the road ahead.”