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Crisil Ratings in its latest report has said that Oil marketing companies (OMCs) are expected to see a drop in operating profit to $12-14 per barrel in fiscal 2025 from $20 per barrel last fiscal. The decline is primarily due to discounts on Russian crude oil, a softening of diesel spreads, and inventory losses.

The report noted that stable retail fuel prices amid volatile oil prices will help support overall returns for the industry. Despite the decrease, the operating profit will still be higher than the $9-11 per barrel average over the past decade through fiscal 2024. This will partially support OMCs’ substantial capital expenditure (capex) requirements. An analysis of public sector OMCs rated by CRISIL Ratings, covering 90 per cent of the sector, confirms this trend.

OMCs earn through two main channels: refining and marketing. In refining, they earn a gross refining margin (GRM) - the difference between the value of refined products at the refinery gate (benchmarked to international prices) and the cost of crude oil used in production. In marketing, they earn a margin on petrol, diesel, and other petroleum products sold.

While oil prices declined by 11 per cent year-on-year to an average of $83 per barrel in fiscal 2024, inventory value fluctuations had a marginal impact on overall GRM, reported at $12 per barrel. Core margins remained robust due to high diesel spreads, sustained by geopolitical uncertainties that disrupted global energy supply chains, keeping international prices elevated. Furthermore, stable retail fuel rates contributed to healthy marketing margins (net of operating expenses) of Rs 4 per litre or $8 per barrel, resulting in an overall profit of $20 per barrel for the year.