Profit of oil companies will decrease in FY25 as refining margin drops

The profit of the oil marketing companies (OMCs) will reduce in the FY25 amid the reduction in the Gross refining margin of the oil companies.

The Gross Refining Margin (GRM) of Indian oil companies in FY23 was at USD 16-18/ Barrel (bbl), in FY24 the GRM of Indian Refiners moderated to an average of USD 10 - 12/bbl. According to a report by CareEdge ratings, the GRM of oil companies will reduce further to USD 6-8 in FY25.

The report highlights that this moderation was on the back of a narrowing discount on Russian crude along with a reduction in product cracks. Despite decrease in GRM in FY24, the operating profit of Indian oil players jumped multi-fold in FY24 over FY23 due to higher marketing margin.

According to the Ministry of Petroleum and Natural Gas, the combined profit of oil marketing companies for FY 2023-24 stood at Rs 86,000 crore, over 25 times higher than the previous fiscal year.

The report says that the marketing margin is also expected to reduce on the back of a reduction in the retail price of petrol and diesel by Rs.2/litre implemented from mid-March 2024.

Crude oil prices are strongly influenced by the global economic outlook, the supply of oil managed by OPEC, and other geopolitical factors. The price of crude oil experienced an upward trajectory in FY22 as the impact of the COVID-19 pandemic receded and demand rebounded.

However, the conflict between Russia and Ukraine from February 2022 caused crude oil prices to reach record levels in the first half of FY23. Crude oil prices continued to slide subsequently as global consumption of crude oil declined owing to a global slowdown with the sluggish recovery of the Chinese economy, interest rate hikes and inflationary pressures.

However, in August 2023, and April 2024 there was a surge in crude oil prices due to production cuts announced by OPEC+, mainly Russia and Saudi Arabia. Geopolitical factors including tension in the Middle East also keeping the crude oil prices firm.