State-owned oil marketers are likely to turn profitable on fuel marketing in the current fiscal ending on March 31, 2024, following large losses in the previous year, Fitch Ratings said on Monday. The rating agency expects India’s petroleum product demand to grow by mid-single digit percentage in the medium term, supported by forecast that the GDP will grow by 6-7 per cent in the next few years, the government’s increasing spending on infrastructure and a pick-up in industrial activity.
“We expect the Indian oil marketing companies’ marketing segment to turn profitable from the financial year ending March 2024 (FY24) as crude oil prices fall to Fitch’s assumption of $78.8 per barrel, following large losses in FY23 due to high crude prices and unchanged retail fuel prices,” it said. This should enable the oil marketing companies (OMCs) to partly recoup the FY23 (April 2022 to March 2023) losses in first half of FY24, before the fall in crude prices in recent months is reflected in retail prices.
The government previously allowed the recovery of such losses in subsequent periods, before reversing the suspension of daily price resets. State-owned retailers Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) did not raise petrol and diesel prices last year despite rise in crude oil prices. With oil prices now receding, they are now recouping the losses.
Fitch Ratings expected India’s petroleum product demand in the financial year ending March 2024 (FY24) to grow by a mid-single digit percentage after a 10 per cent rise in FY23, which was aided by the post-pandemic pent-up demand. Medium-term product demand growth is supported by Fitch’s expectation of 6-7 per cent GDP growth for India over the next few years, driven by the government’s increasing infrastructure spending and a pick-up in industrial activity.
“We expect Indian refiners’ gross refining margins (GRM) to moderate in FY24 from the record high in FY23 as we expect an easing of tight industry conditions. However, we still expect FY24 GRMs to be above mid-cycle levels due to increasing demand after China’s reopening and uncertainty over Russia’s transportation fuel supply,” it said. The normalisation of product spreads has also prompted India to discontinue in recent months the special excise duties on exports of diesel and aircraft turbine fuel that were imposed in July 2022.
Fitch expected crude oil prices to moderate from the highs of FY23, but remain elevated, which will support robust cash flow generation for upstream producers Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) in FY24. “We benchmark the entities’ gas realisations to 10 per cent of Fitch’s crude price assumptions, restricted within a floor price of USD 4 per million British thermal unit and ceiling of USD 6.5, based on India’s new gas pricing regime for legacy fields. This should reduce their cash flow volatility,” it said.
The rating agency expected capex intensity to stay high. Reliance Industries Ltd’s capex is for its oil-to-chemical, new energy and digital businesses. Upstream producers will invest in enhancing production from mature fields and maintaining adequate reserves, while the OMCs expand their refining, petrochemical and retail network capacities. Green capex would gradually increase in the sector over the medium term. “We expect India’s crude oil production to stabilise in FY24 as investments in technology to raise recovery and tap isolated reservoirs by India’s largest upstream producer ONGC help arrest the natural decline in production from mature fields. Enhanced oil recovery and field development projects, like the fifth phase of redevelopment of the Mumbai High project on the western coast, support ONGC’s production targets,” it said.
India’s crude oil production fell by 1.7 per cent in FY23, led by a 1 per cent decline by ONGC that offset a 5 per cent rise by the smaller OIL. “We expect India’s crude oil import dependence to continue rising in FY24 due to strong demand for petroleum products and stable domestic crude oil output. India’s crude oil imports rose by 10 per cent in FY23 and the reliance on imported crude increased to 87.3 per cent (FY22: 85.5 per cent) of total demand,” Fitch said.
India’s oil supplier mix has changed since the start of the Russia-Ukraine war last year. Russia’s share of Indian oil imports rose to 37 per cent by April 2023 from less than 2 per cent in March 2022. Natural gas production is expected to increase by mid-single digits in FY24, supported by a rise in Reliance Industries’ production to 24 million standard cubic metres per day (mmscmd) in FY24 from 19 mmscmd in FY23. Supply growth will be further supported by ONGC’s development projects on both the western and eastern coasts, including from a gradual ramp-up in production at its KG-D5 offshore deep-water field.
This follows a 1 per cent growth in India’s domestic gas production in FY23 amid strong demand from city gas distribution (CGD) companies, despite high prices under the previous pricing regime. “We expect overall gas consumption to grow by mid-single digits in FY24. India’s imported LNG dependence should remain stable in FY24, after falling to 44 per cent of demand in FY23, given our expectation of a commensurate increase in both domestic and imported gas volumes,” it added.
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