India’s oil marketing companies (OMCs) could see a sharp recovery in petrol and diesel margins in the second quarter of FY27, although continued losses on LPG sales are likely to limit the overall benefit, according to a report by JM Financial Institutional Securities.The brokerage expects the combined refining and marketing margin on petrol and diesel to rise to Rs 11.4 per litre in Q2FY27, from Rs 2.4 per litre in the previous quarter.However, after accounting for LPG losses, the effective margin is expected to be lower at Rs 8.5 per litre.JM Financial said the combined petrol and diesel margin could still remain around Rs 1 per litre below its historical average of Rs 12.5 per litre.
LPG losses remain a drag on margins
The brokerage estimates that OMCs could incur LPG losses of around Rs 11,000 crore in Q2FY27, although this would be lower than the Rs 21,200 crore estimated for the first quarter.LPG losses are expected to reduce the benefit from petrol and diesel refining and marketing margins by around Rs 2.9 per litre in Q2FY27, compared with Rs 5.6 per litre in the previous quarter, according to the report.JM Financial said refining margins continued to receive support from disruptions in global petroleum product supplies.“Refined product cracks may remain strong in near term as product markets continue to be tight,” the brokerage said.It noted that global refinery throughput had declined by around 4-5 million barrels per day from a year earlier, with refinery disruptions in the Middle East and Russia, along with lower operations at some Asian refineries, contributing to tighter product supplies.
Crude prices remain key risk
The Singapore refining margin averaged $20.5 per barrel during the second quarter of FY27 for the period covered by the report, JM Financial said. Strong diesel margins, which averaged $61.7 per barrel, supported the overall refining margin.However, the recovery in fuel retailing profitability remains sensitive to crude oil prices.The brokerage estimates that OMCs could earn normal margins at a landed Brent crude price of around $95 per barrel under the current fuel pricing and tax structure.If the government completely reverses earlier excise duty cuts and retail fuel prices are increased, OMCs would need landed crude prices to fall to around $65 per barrel to restore normal margins.This compares with the earlier estimate of $70 per barrel before the Middle East crisis, with the change attributed to rupee depreciation and higher transportation costs.The margin outlook comes against a backdrop of elevated crude prices and pressure on OMC cash flows.According to an ICRA report, state-run IOC, BPCL and HPCL were facing marketing losses of Rs 8 per litre on petrol and Rs 9 per litre on diesel, while domestic LPG under-recoveries stood at around Rs 300 per cylinder in September.ICRA said higher crude and product prices could weigh on OMC profitability and cash flows and increase their short-term borrowing requirements for working capital.It said the impact on OMC earnings in FY27 would depend on crude prices, product cracks, domestic retail price revisions and government support for LPG under-recoveries.
