The quarter ended 30 September was good for the refining business. Singapore gross refining margins (GRMs) averaged $9.1 (around Rs.500 today) per barrel last quarter. The strength in GRMs was primarily driven by refinery outages, mainly in China, Japan and Taiwan, resulting in stronger cracks. Gasoline spreads particularly remained higher last quarter.
All this reflected positively in the numbers of Indian oil companies for the quarter ended September.
However, investors are likely to be in for some disappointment on the refining margins front this time around.
GRMs have seen a substantial correction in this quarter. In a note to clients on 12 November, Bank of America Merrill Lynch analysts maintained that Singapore GRM was down 10%, week-on-week, at $5.7 a barrel last week. “It has now declined by 43% in the last four weeks. Singapore GRM in 3Q FY13TD at $7.7 per barrel is down 3% YoY (3Q FY12: US$7.9/bbl) and 16% QoQ from US$9.1/bbl in 2Q FY13,” the report said.
So why are refining margins weakening? For one, GRMs for the September quarter were abnormally high and driven mainly by outages. Demand in general had not dramatically improved in the last quarter. So margins had to correct, as many refineries that were shut came online.
Emkay Research points out that Singapore refining margins decreased last month as spreads across fuel oil and HSD (high speed diesel) went down. Analysts say that since there are hardly any expectations about a dramatic improvement in demand, it’s likely that margins for the current quarter will end up lower on a sequential basis.
Of course, this means that the financial performance of Indian companies such as Reliance Industries Ltd, Essar Oil Ltd and Mangalore Refinery and Petrochemicals Ltd will be affected in the current quarter.
What’s of more consequence is that over a longer time frame, the global refining environment is expected to be subdued. That’s because capacity is expected to be more than demand.
“Structurally, refining cycle is expected to remain weak with incremental net refining capacity additions expected to the tune of 1 million barrels per day (mbpd)/1.3mbpd in 2012 /2013, as against demand growth of 0.8mbpd/1mbpd,” said an Emkay report.