Oil Marketing companies (OMCs) like HPCL, BPCL refine and market oil that they buy from upstream oil exploration and production companies like ONGC, Cairn India. Their purchase price is directly related to international crude price. Thus lower prices are actually positive for oil marketing companies.
OMC revenues will improve if Crude oil price continues to fall as this results in better:
(1) Inventory Gain
(2) Gross Refining Margin
(3) Gross Marketing Margin
(1) Inventory Gain
In Q4FY20 and Q1FY21, crude had averaged lower due to global economic uncertainty because of the coronavirus outbreak and disintegration of the OPEC+ alliance which triggered an all-out price war between Saudi Arabia and Russia. This helped OMCs to buy crude (as their raw materials) at lower price and pile up the inventory for the future.
So, higher crude prices mean inventory gain for an oil marketing company. If the market price of crude oil increases, refiners that bought the existing stock at lower prices end up selling through retail outlets at higher rates, and vice-versa.
From the start of the quarter, Brent Crude gained over 80% — posting its biggest quarterly gains since 1990. Such a move helped OMCs to sell the crude, purchased at lower prices, at higher rates in the market which limited the losses.
However, in Q2, all three OMCs could report an inventory gain as the average crude prices were higher than the value of the inventory at the end of Q1.
2) Gross Refining Margin
A barrel of crude, when cracked chemically, produces an entire range of fractionates like petrol, diesel, LPG (liquefied petroleum gas) and furnace oil, each having different applications.
The Gross Refining Margin or GRM is the difference between the total value of petroleum products coming out of an oil refinery (output) and the price of the raw material, (input) which is crude oil. The margins are calculated on a per-barrel basis.
Recent slump in global crude oil prices in the Q1FY21 boosted their gross refining margins (GRM). It is likely to push auto fuel marketing margins up. OMCs’ core GRM is up to $4.4–4.7 per bbl in September to date.
No, doubt this will affect their bottom-line positively.
3) Gross Marketing Margin
Gross marketing margin is the mark-up earned by the OMCs on sale of every litre of petrol and diesel. If crude ( raw material) prices fall and retail prices remain the same or increase, then OMCs earn higher gross marketing margin and vice versa.
Thus, on an average, throughout the quarter, gross marketing margins remained lower, but stable compared to last quarter. Gross marketing margins earned on the sale of every litre of petrol and diesel stood at ₹ 4.2 and ₹ 3.8, respectively in September ended quarter.
In Q1, while the crude prices were trending lower, retail prices remained the same, which helped the OMCs earned abnormally high gross marketing margin.
Technical Analysis of HPCL:
As per RSI and Bollinger Bands the stock is expecting a bounce-back. Trading near to its support level.
Note: The benefits of abnormally high gross marketing margin were limited as the lockdown announced in the country to limit the spread of COVID-19 impacted the fuel consumption. Fuel consumption in the country was lower when the margins were higher and when fuel consumption started to increase, as India eased lockdown, margins were lower. So long term investor can thing of doing Bottom fishing now.