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India's oil refiners and OMCs face severe challenges as demand shrinks

India's oil refiners and OMCs face severe challenges as demand shrinks

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.

Officials in state run oil marketing companies also said that with demand for petroleum products, primarily petrol and diesel, shrinking by almost 60 per cent in the first half of April on Covid-19 related lockdown and projections that overall demand for fuel will be over 30 per cent lower in the first quarter of this financial year, they were left with no option but to cut production with refinery run almost dipping by 50 per cent now.

To add to the problem is almost full storage capacity at fuel stations and at sites created by refiners. Analysts estimate that almost entire 85 million barrel storage capacity with the state-run companies is full. This means that if the production continues at normal pace, products would either have to be disposed off to whosoever wants it at whatever prices or stored at floating or leased storage abroad at high cost.

Meanwhile, a Crisil Ratings study said that 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 (GRMs) would follow 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, Organisation of Petroleum Exporting Countries (Opec) 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 the current financial year 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..