Jefferies expects a gradual normalization of energy prices as peace returns to the Middle East, a shift the firm says should improve the operating backdrop for Indian oil marketing companies.
At present, marketing losses on petrol and diesel at Spot Brent have narrowed to Rs -2 per liter and Rs -11 per liter respectively. Jefferies noted that marketing margins at Spot Brent should climb to levels above normal assuming typical gross refining margins, a move that could prompt some reintroduction of excise levies that were reduced in March.
On the refining front, Singapore gross refining margins are currently around $18 per barrel, roughly four times their level in late February. Crack spreads for key refined products sit at elevated levels: gasoline at $32 per barrel, diesel at $41 per barrel and aviation fuel at $44 per barrel. The firm also highlighted that approximately 3.4 million barrels per day of refining capacity has been damaged since the conflict began, equivalent to about 3.5% of global refining capacity.
Brent crude has corrected to about $83 per barrel, yet gasoline and diesel cracks remain supported by higher freight costs, which Jefferies reports are about double the levels seen in late February. The broker said that once refining operations normalize, marketing margins could turn positive at current crude prices.
Using a scenario with petrol and diesel cracks at $20 per barrel, normalized freight rates and Brent at $83 per barrel, Jefferies calculated petrol and diesel marketing margins would be around Rs +5 and Rs +8 per liter respectively.
The Indian government lowered excise duty on petrol and diesel by Rs 10 per liter at the end of March. Jefferies said that if marketing margins move above normal levels of Rs 3.5-4 per liter, the government could raise excise duty to partially offset the earlier reduction.
On stock performance since the start of the conflict, BPCL and IOCL shares are down about 19% and 23% respectively, while HPCL is down approximately 8%. Jefferies described BPCL and IOCL as strong risk-reward opportunities.
The broker observed valuation and return differences among the state refiners. BPCL is trading at a lower price-to-book valuation than HPCL, reversing a decade-long pattern in which BPCL generally carried a premium. BPCL also reports a full-cycle return on equity of 25%, ahead of HPCL’s 16.5%. IOCL’s valuation sits nearly one standard deviation below its long-term average.
Based on its analysis, Jefferies maintains a Buy rating on BPCL with 37% potential upside and on IOCL with 24% potential upside.
Contextual note - Jefferies links the improvement in marketing margins to a combination of falling crude, normalized refining throughputs, and freight rates returning closer to pre-conflict levels, while also pointing to the possibility of fiscal adjustments by the government tied to margin normalization.