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Coronavirus: Indian oil companies stare at inventory losses, low fuel margin

Mumbai: A fall in global crude oil prices following China demand concerns, largely because of the coronavirus outbreak, may help India contain its current account deficit but will lead to inventory losses and lower margins for domestic oil marketing companies - Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd.

The virus outbreak in China has hit demand for crude oil and petroleum products, with the International Energy Agency (IEA) and the Organisation of the Petroleum Exporting Countries (Opec) trimming demand forecasts. This has led to a fall in global crude oil prices.

"If crude oil prices continue to decline till March, then we will have a huge inventory loss, which will suppress our margins. Because crude prices at which we have had these products as of December is around $68 per barrel. Today crude oil is at $54 per barrel, a steep fall," said director finance from an oil marketing company.

Crude oil prices have fallen by around 10% in the last one month. Currently, it is at $59.20 per barrel. At this level, markets have gone into contango where spot rates are lower than that of futures contracts.

Refining firms in China have been forced to reduce output and cancel contracts as quarantines and flight cancellations have hurt demand and distressed cargoes are now being offered to large consumers like India.

"In the downstream sector, lower oil prices are expected to lead to inventory losses in the short term even as under-recoveries on sensitive products are likely to decline," said ICRA Ltd in a note on 18 February.

Oil marketing companies did not reply to an email sent on February 19.

"This kind of fall in crude oil prices has been unprecedented. We would prefer crude prices to hover around $65 per barrel. That is our comfort level," a senior official from an oil marketing company said.

ICRA added that realisations of Indian upstream companies on crude sales would decline due to lower oil prices, severely impacting the profitability of the sector. "Though the OPEC+ is already considering deeper production cuts, nevertheless if lower crude oil prices sustain, the capex programs of private companies could be impacted," ICRA said.

Though low product prices have the potential to invigorate demand, the same is expected to be outweighed by the demand slowdown.

Accordingly, with gross refining margins (GRM) at low levels, global demand slowdown is expected to exacerbate crack spreads leading to more pressure on the GRMs, which would be offset partially by lower fuel and losses.