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Credit rating agency Crisil in its latest report has said that India’s oil marketing companies (OMCs) could see operating profit rebound to Rs 1 lakh crore this fiscal (FY24), compared with an average of Rs 60,000 crore between fiscals 2017 and 2022, and thrice last fiscal’s low of Rs 33,000 crore. It said the higher profitability would help improve the sector’s credit metrics, which had weakened significantly in the past few fiscals amid muted profitability and significant capital expenditure (capex).

According to the report, the government-owned OMCs earn from two businesses: refining, where they earn a gross refining margin which is the value of refined products at the refinery gate minus the cost of crude oil used to produce them; and marketing, where they earn a margin on petrol, diesel and other petroleum products sold mainly through retail pumps. It noted that fiscal 2023 saw record gross refining margins averaging $15 per barrel. It also said global demand, particularly for diesel, was strong as prices of alternative fuels such as natural gas soared and the European Union imposed sanctions on Russian products.

However, the report said soaring crude oil prices, which averaged $94 per barrel for the fiscal, were not accompanied by higher retail prices, which have remained unchanged since May 2022. What that meant was, despite strong refining margins, marketing losses were a steep Rs 8 per litre, which kept the overall profitability of OMCs weak last fiscal. Fortuitously, there was a steady fall in the price of crude oil as last fiscal progressed, which helped OMCs swing from an operating loss in the first quarter to strong profits in the fourth quarter.