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    Oil price fall boosts GRMs, to push marketing margins up for OMCs

    Oil price fall boosts GRMs, to push marketing margins up for OMCs

    Oil price fall boosts GRMs, to push marketing margins up for OMCs
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    By Ankit Gohel   IST (Updated)

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    The recent slump in global crude oil prices has trimmed the inventory gains for Oil Marketing Companies in the second quarter of fiscal 2021 but has also boosted their gross refining margins (GRM). It is likely to push auto fuel marketing margins up.

    The recent slump in global crude oil prices has trimmed the inventory gains for Oil Marketing Companies in the second quarter of fiscal 2021 but has also boosted their gross refining margins (GRM). It is likely to push auto fuel marketing margins up.
    OMCs’ core GRM is up to $4.4-4.7 per bbl in September to date boosted by a surge in refinery transfer price (RTP) based cracks.
    ICICI Securities estimates OMCs’ Q2-till date core GRM at $1.7-2.5 per bbl and that including crude inventory gain at $3.2-6.5 per bbl.
    “GRM recovery is driven by oil price fall and throughput cuts. US refinery utilization was down to 71.8% due to hurricane-related shutdowns. China teapot refinery utilisation was also down to 73% in Aug’20 from 76% in Jun’20. Middle Eastern crude producers pricing most of their crudes at discount to Dubai/Oman in Oct’20 vs premium in Q2FY21 would also boost OMCs’ GRM in Oct’20,” the brokerage noted.
    Meanwhile, despite a cut in retail price of petrol and diesel by Rs 0.53-1.0 per litre since Sep 5, the net marketing margins are expected to rise. If the retail prices are not cut further, the margin may rise to Rs 5.01 per litre on October 1.
    The auto fuel net margin has been Rs 4.45 per litre in FY21-TD. If it remains above Rs 2.1 per litre in the rest of FY21, ICICI Securities expects it to be over Rs 3 per litre for FY21.
    This would mean an upside to FY21E EPS of 14-15 percent for Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation (HPCL) if net margin is at Rs 3 per litre.
    Attractive valuation, strong auto fuel net margins and privatization in the sector would be key triggers going ahead. ICICI Securities reiterated Buy on HPCL and Add on IOC.
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