BackGross refining margins fall to four-year low as fuel prices slump
Indian Oil, Bharat Petroleum and Hindustan Petroleum are operating at GRMs which are the lowest in the last four fiscals
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Mumbai: State-owned refineries in India have seen their gross refining margins, (GRMs) a key metric of profitability, fall to a four-year low due the low prices of petrol and diesel which account for the bulk of sales for these firms.
GRM is the difference between the price at which refiners purchase crude oil and the price at which they sell the end product after refining. Major refined products are petrol (gasoline), diesel (gas oil), kerosene, LPG, furnace oil and naphtha.
According to data from the Petroleum Planning and Analysis Cell (PPAC), a statistical body under the ministry of petroleum and natural gas, Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) are operating at GRMs which are the lowest in the last four fiscals.
At September-end 2014, IOCL posted an average GRM of $0.09 per barrel, BPCL $2.36 per barrel and HPCL $2.09 per barrel. This is in sharp contrast to the last three years’ average GRMs of $3.67 per barrel, $4.15 per barrel and $2.63 per barrel posted by the three state-owned refiners respectively.
GRMs depend on the weighted average of the individual price difference of each fuel (petrol, diesel, etc.) with crude oil prices. This difference is called commonly called as crack.
Therefore, the GRMs that each refinery earns depend largely on the global trend in cracks and the product mix sold by each refiner.
“Since in India, 50% of the products produced from the state-owned refineries is petrol and diesel, the GRMs of Indian refineries are heavily skewed towards the trend of petrol and diesel cracks," said Dhaval Joshi, analyst with brokerage Emkay Global Financial Services Ltd.
According to the last four years of data available from Bloomberg (till September 2014), while the gasoline or petrol to WTI crude crack (the price difference between petrol and WTI crude) has shrunk by 28%, during the same time the price of WTI crude has fallen by 14%. Similarly, for the corresponding period, while the gas oil or diesel to Brent crack (difference between price of diesel and Brent crude) has shrunk by 18.75%, the price of Brent has fallen by 15%.
Clearly, the cracks have contracted more than the price of crude oil in the last four years.
Joshi from Emkay said the main reason behind this is that the demand for the two important fuels—petrol and diesel— has fallen more than the fall in the price of crude oil, reflecting on the crack.
“What is more important for us is the individual product price and the price of crude, what we call crack. If cracks are good, refining margins are good but during the last few months, cracks have not been very good; as a result, our margins have depleted, said B. Ashok, chairman and managing director of Indian Oil in an interaction with the media on 29 November. He added that while the outlook for cracks is slowly improving, this will take some time to reflect on GRMs.
Analysts are also expecting GRMs to remain weak at least till the end of the fiscal.
“We expect GRMs to remain weak in the medium term, though 3Q could show a marginal bump in GRMs as sizeable capacities in west are under-going maintenance," said a 17 November note by brokerage Spark Capital Advisors (India) Pvt. Ltd. The report added that the fall in crude prices should help in pushing up GRMs by $1-$1.5/barrel over time in the next six months.
Another analyst with a Singapore-based brokerage said while there has been a slight uptick in GRMs in the third quarter, it is not sustainable, as there are no signs of an improvement in demand for primary fuels such as petrol and diesel.
“The GRMs will again be pulled down, especially for the Indian companies due to weak cracks," he said.
Another concern for Indian refiners is inventory losses which may accumulate due to the time difference between when the crude was purchased and when the final refined products are sold.
A steep fall in crude prices over the last few months has led to lower selling prices of end products, even though the crude for refining was purchased at higher costs by the companies.
“We hold an inventory of around 45 days and this has impacted us in the second quarter. But this is a temporary phenomenon and sometimes we get the benefit also of holding a 45-day inventory," said Ashok of Indian Oil.
Analysts with brokerage house IL&FS Broking Services Pvt. Ltd said in a 28 November note, that oil marketing companies are expected to report large inventory losses on their crude and product inventories, which are likely to affect their GRMs and earnings for fiscal 2015. “…we cut our earnings estimates for OMCs by over 73% for fiscal 2015," said the note.
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