How A Drop In Brent Crude Oil Prices Impacts Indian Oil Companies

Brent crude, which is the global benchmark for oil prices, plunged to an intraday low of 5.17% at $73.51 per barrel on Sept. 3. This level hovered around a nine-month low and was the first time brent prices slipped below the $75 per barrel-mark since Jan. 3.

Oil prices have now given up almost all of their gains this year and are down over 15% since the start of July 2024. This has a two-fold impact on Indian oil companies.

Oil Marketing Companies To Benefit

Oil marketing companies such as Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. are significant beneficiaries when crude oil prices decline.

These companies' earnings primarily rely on two segments: refining and marketing. The refining segment involves transforming crude oil into valuable products like petrol, diesel, and jet fuel, while the marketing segment focuses on the distribution and sale of these refined products.

Indian Oil, Bharat Petroleum, and Hindustan Petroleum have kept their retail prices for petrol and diesel unchanged for the past 28 months. As a result, their marketing margins are now closely tied to fluctuations in oil prices and refining margins. With oil prices on a downward trend and global refining margins recovering, this situation is favourable for oil marketing companies.

Hindustan Petroleum stands to benefit the most due to its lower degree of refined integration, according to Emkay.

The company refines approximately 6 million tonnes of crude oil and markets about 12.5 million tonnes, resulting in a refining-to-marketing ratio of around 45%, the brokerage noted. For every $2 decrease in crude oil prices, marketing Ebitda is positively affected by nearly Rs 1,500 crore, according to it.

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Importance Of The $75-Mark

For oil exploration and production companies like Oil India Ltd. and Oil and Natural Gas Corp., falling oil prices pose a significant risk to their earnings.

According to Nuvama Research, Oil India and ONGC are currently in a 'no-win' situation with earnings largely constrained. This is due to the government's windfall tax, which imposes a higher rate whenever crude oil prices exceed $75 per barrel.

As a result, if crude oil prices rise above $75 per barrel, the sales revenue for these companies is capped at the price. Conversely, if oil prices fall below this threshold, their earnings remain at risk because the market selling price of oil is also lower, Nuvama noted.

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