Inventory losses to hurt Indian refining margins

OREANDA-NEWS. Indian state-controlled refiners are forecast to post weaker refining margins when they announce quarterly results this week, with a dip in oil prices resulting in huge inventory losses.

Oil and chemical companies in India may incur losses of around 160bn rupees (\$2.6bn) in the October-December quarter of the 2014-15 fiscal year ending 31 March, according to a report by Crisil, a Standard & Poor's controlled ratings and research agency.

Inventory losses are huge in spite of a fall in under-recoveries, or the revenue losses that state-controlled refiners incur from selling subsidised fuels below market prices. Domestic diesel prices were only liberalised in October.

Most of the aggregate inventory losses will be borne by refiners, as prices of global benchmark Brent crude have slumped by nearly half since mid-2015, hurting their refining margins.

"Crude oil prices fell by a third, and closed out 2014 at \$55/bl in the September-December period," Crisil said. Oil product prices fell in tandem but refiners, which holds stocks of 15-45 days of crude depending on the location of the refineries, have paid higher prices for crude.

Crisil compiled the data after studying around 250 companies including refiners, trading firms and chemical producers. They carry an average inventory of 45 days.

Refining margins at Indian private-sector conglomerate Reliance Industries, which operates a 1.2mn b/d refining complex in Jamnagar, fell by 12pc during October-December to \$7.30/bl from \$8.30/bl the previous quarter. Margins in the same quarter for fellow private-sector Indian refiner Essar Oil fell by 12pc from a year earlier to \$7/bl.