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Petroleum industry

Oil Refiners to Face Profitability Hit Due to Inventory Losses

Strategic Insights

— 1 min read

Mumbai's state-owned oil refiners are expected to face significant profitability losses due to inventory losses during the current financial year. Icra Ltd's research division, ICRA Research, has predicted that oil refiners sustained inventory losses worth Rs. 30,000 crore in the third quarter after international crude oil prices fell by about 40%. This may not only impact the current financial year but also the next fiscal year. Despite this, there is a silver lining with falling under-recoveries leading to a decrease in borrowing levels and interest burden, resulting in improved profitability and liquidity for the oil marketing companies (OMCs).

Key Takeaways:

  • Icra Ltd's ICRA Research predicts that crude oil inventory losses will weaken profitability of state-owned oil refiners during the current financial year.
  • Oil refiners sustained inventory losses worth Rs. 30,000 crore in the third quarter, following a 40% fall in international crude oil prices.
  • The losses will not only impact the current financial year but also potentially have a negative impact on the next financial year.
  • Gross refining margins (GRMs) are expected to remain subdued in the current financial year due to large inventory valuation losses.
  • FALLING UNDER-RECOVERIES ARE RESULTING IN A DECREASE IN BORROWING LEVELS AND INTEREST BURDEN, LEADING TO IMPROVED PROFITABILITY AND LIQUIDITY POSITIONS FOR THE OMCs.
  • The government's subsidy burden has decreased significantly, with a 38% year-over-year (y-o-y) fall in compensation during the first nine months of the current financial year.
  • K. Ravichandran, senior vice-president and co-head of corporate ratings at ICRA Ltd, notes that exchange losses are expected to be sizeable due to the depreciating INR against USD.

Statistics:

  • Rs. 30,000 crore: Amount of inventory losses incurred by oil refiners in the third quarter.
  • 40%: Decline in international crude oil prices during the third quarter.
  • 38%: Year-over-year fall in the government's compensation for subsidy during the first nine months of the current financial year.
  • INR vs USD: The exchange rate is expected to have a negative impact on oil refiners' profitability due to depreciating value of the INR.

Sources:

  • Icra Ltd (no publication date)
  • HT Syndication with permission from MINT (no publication date)

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