OMCs seen making healthy profits if crude hovers around $85/barrel, and doesn’t flare up
The global oil markets in 2023 were impacted by geopolitical tensions, sluggish demand from the world’s top consumers, and a tightening global supply, all of which resulted in high volatility in prices throughout the year.
Even as the global players try their best to contain the turbulence now, experts see the oil market striving to strike a balance between global demand and supply in 2024 as well.
“Even if such chaotic events (sudden geopolitical tensions) fail to emerge over the next 12 months, volatility will remain high as most energy markets have not yet been able to adapt to previous swings in supply and demand fundamentals to find a new normal,” said Dan Klein, Head of Energy Pathways, S&P Global Commodity Insights.
With production growth accelerating in the US, analysts now see a blurry picture for supply cuts within the Organisation of Petroleum Exporting Countries and whether it will continue to govern the markets as it has been doing till now.
All said and done, if crude prices do bounce back on expectations of demand recovery from China, India’s state-run oil marketing companies (OMCs) might have to incur higher costs on the raw material again, said Gnanasekar Thiagaranjan, Director, Commtrendz Research.
But analysts say this will not affect their long-term profits.During the first two quarters of the financial year, OMC was able to post healthy profits compared to the first half of the last financial year, mainly due to improved marketing margins.
The trading margins of the three public sector companies improved last quarter on the back of falling Russian crude prices, although OMCs kept auto fuel prices unchanged, helping them offset losses incurred when oil prices were high than last year.
Analysts now expect OMC to post healthy refining and marketing profits in the third and final quarters of fiscal 2023-24 compared to corresponding levels last year, given oil price conditions Crude remains at between $85 and $87/barrel.
“However, even with the announcement of further price hikes, we remain bullish on upstream and downstream returns in this price range for India,” ICICI Securities said. At the same time, the current fall in crude oil prices has brought relief to OMCs. Its refining gross margin could improve thanks to the wider availability of crack diesel.
ICICI Securities stated: “Recent trends in product spreads imply that gross refining margins will remain in the range of $7-8/bbl (Singapore), implying a $2-3/bbl differential. barrel for OMC”. “Along with strong retail fuel margins, earnings momentum is expected to be strong for OMCs in FY24-25E.
Additionally, the country’s gas industry is expected to experience stronger demand in 2024.
“Even LNG spot prices are moderating, while there are concerns about oil and gas demand growth – supply costs to CGDs (city gas distribution companies) could will remain under control, thereby creating stronger gas demand in FY24-25E. ” ICICI Securities said in its report.
According to S&P Global, production growth is expected to slow but remain positive in 2024, further driving increased LNG and pipeline exports.
“Despite low Henry Hub gas prices in 2023, and a pullback in gas-oriented drilling, lower-48 natural gas production will reach 103.4 billion cubic feet per day (Bcf/d) in 2024, up by 4.3 Bcf/d due to strong oil prices stimulating associated gas production.”
The consumption of natural gas is also seen rising in the power sector in the next financial year on the back of rising demand for power.
“We see a 30-40% rise in demand for gas from the power sector starting from February as the power ministry expects the prices to touch the ceiling of Rs 10 for most time of the day after which it becomes viable for power companies to purchase gas,” said Rajesh Mediratta, MD and CEO of the Indian Gas Exchange.
Even though it remains to be seen how the global demand and supply fundamentals pan out for the energy markets, a price range of $75-80/ bbl for crude remains ideal to maintain the profitability of Indian OMCs, while for gas companies, the reduction in LNG prices by $1.2–1.3/MMBtu is a material benefit from a pricing competitiveness and margin standpoint, said analysts.
“Strong non-OPEC+ supply growth and slowing oil demand growth have led OPEC+ to curtail output and support prices. While this tactic has achieved some success, maintaining discipline among member countries may be difficult in 2024 as the loss of market share continues and non-OPEC+ volumes increase,” said Kurt Barrow, Head of Oil Markets, S&P Global Commodity Insights. “The ability to comply with OPEC+ voluntary production cuts will be the deciding factor in crude oil prices next year.”
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