India’s Growing Fuel Consumption
India’s oil story has taken a surprising turn. While the country is consuming more petroleum products than ever before, the companies refining and selling this fuel are struggling to make profits. This paradox is affecting Oil Marketing Companies (OMCs), who handle the marketing, distribution, and sale of refined petroleum products across the country.
The demand for petrol and diesel in India is rising steadily. From April to November 2024, India saw a 3.4% growth in fuel consumption. Diesel, the most used fuel in the country, accounted for 85.9 million tonnes, while petrol consumption reached 34.98 million tonnes during this period. On the production side, domestic petroleum output also grew by 2%. This increase in demand shows that India’s economy is still fuel-hungry, driven by transportation and industry.
However, where does India obtain its crude oil? There has been a significant change in recent years. India imported virtually little oil from Russia prior to 2022. However, as of 2024, Russia has emerged as India’s largest supplier, providing nearly 40% of the country’s crude oil imports. India now buys around 2 million barrels of Russian oil per day. In FY23 alone, 50.84 million tonnes of crude oil came from Russia, worth a staggering $31 billion.
Despite rising domestic demand and increased crude oil imports, the refining margins for OMCs have sharply declined. This highlights the challenges these companies face in the global oil market.
Why Are Refining Margins Falling?
Gross Refining Margin (GRM) is a critical measure of a refinery’s profitability. It is the difference between the price of crude oil and the price of refined fuels like petrol and diesel. In FY23, Indian OMCs reported exceptionally high GRMs, thanks to global factors. For example:
- Indian Oil (IOCL): $19.52 per barrel
- Bharat Petroleum (BPCL): $20.04 per barrel
- Hindustan Petroleum (HPCL): $12.09 per barrel
This marked a significant increase of 68%-109% compared to the previous year. However, the situation changed drastically in the first half of FY24. GRMs for public OMCs fell by 80%, dropping to an average of just $4.08 per barrel. Several global and local factors are causing this steep decline in refining margins:
- Weak Global Demand: One major reason for falling margins is the weak demand for fuel in global markets. China, the world’s second-largest consumer of crude oil, is facing slower economic growth. When China’s factories and industries reduce their fuel consumption, global demand for refined products like petrol and diesel also drops. This reduces the price difference between crude oil and refined fuels, shrinking profit margins for refiners worldwide, including those in India.
- Shrinking Russian Oil Discounts: In 2022, Russia offered large discounts on its crude oil due to international sanctions. Indian refiners were able to buy Russian oil at discounts of up to $30 per barrel, which helped boost profits. However, as of 2024, these discounts have nearly disappeared. The discount on Russian oil has now fallen to just $2.5-$4 per barrel. This reduction has significantly increased the cost of crude oil for Indian refiners, eating into their profit margins.
- Pricing Challenges in India: Indian OMCs face additional challenges due to the way fuel prices are set in the country. Prices are based on two global benchmarks:
- Import Parity Price (IPP): The cost of importing crude oil, including transportation and taxes.
- Trade Parity Price (TPP): A mix of import and export prices that determines the final price of refined fuels like petrol and diesel.
Even though domestic demand for fuel is rising, these pricing methods tie fuel prices to international rates. This means OMCs cannot fully adjust prices to match local demand or recover higher costs. When global fuel prices fluctuate, Indian refiners struggle to make profits.
How Are Oil Companies Adapting?
India’s Oil Marketing Companies are responding to these challenges by focusing on several strategies. First, they are expanding their retail networks to meet the rising demand for fuel across the country. By increasing the number of fuel stations, they hope to capture a larger share of the domestic market.
Second, OMCs are diversifying their businesses to reduce their dependence on refining margins. Many companies are investing in renewable energy and petrochemical projects to create alternative sources of income. Petrochemicals, for example, are widely used in plastics, fertilizers, and other industries, providing an additional revenue stream.
At the same time, government support for initiatives like LPG distribution is helping OMCs stabilize their revenues. However, government-imposed pricing caps continue to limit their ability to pass on higher crude oil costs to consumers.
India’s Oil Story: Challenges and Growth
India’s fuel story is full of contradictions. On one hand, the demand for fuel is rising steadily, driven by economic activity and growing transportation needs. On the other hand, falling refining margins are squeezing the profits of oil marketing companies.
Global challenges like weak demand, shrinking discounts on Russian oil, and India’s pricing structure are making it harder for OMCs to maintain their profitability. Despite these obstacles, Indian refiners are adapting by expanding their networks and exploring new business opportunities to secure their place in the market.
As the fuel market continues to evolve, the ability of Indian OMCs to navigate these challenges will play a key role in shaping the country’s fuel economy.
