Mumbai: Refining margins—a measure of profitability from processing crude oil into fuels—have widened by up to 80% since the start of 2009 on reduced capacity utilization at refineries and cheaper feedstock.
But analysts are divided on how much Indian refiners can benefit from the increased margins, given that they expect the spurt to be shortlived.
Singapore gross refining margins (GRMs), the Asian benchmark, declined through the second half of 2008, plummeting to a loss of $0.40 (about Rs20 now) a barrel in early November, according to Bloomberg data.
Export benefit: Reliance Industries refinery at Jamnagar. Private refiners such as RIL could see higher profits.
Refining margins measure the difference between the cost of crude oil and the wholesale price at which a refiner can sell petroleum products. The margin includes the costs of refining as well as the refiner’s profit.
From a monthly average of $1.50 a barrel in November, GRMs recovered to $4.20 a barrel in December and $5 a barrel in January. In the first week of February, the margins reached $9.20—a sixfold increase over eight weeks.
“In October and November, the price of both crude oil and its products had crashed severely, with crack spreads for naphtha and gasoline (petrol) in the negative. This was because the demand for fuels had decreased while the refineries had huge inventories processed from high-value crude,” said an analyst at a Mumbai-based brokerage firm. This analyst, who didn’t want to be named, added that product prices had begun to improve in the past few weeks but crude oil, the refining input, was still hovering at $44-45 a barrel, less than one-third of the July levels.
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“That is part of the reason (that’s) boosting the GRM levels. Secondly, the refineries had cut back production or shut down for maintenance a few months ago, and that has decreased the current demand-supply mismatch,” said the analyst. He estimates higher profits for private refiners such as Reliance Industries Ltd (RIL) that export these fuels and reduced under-recoveries of Rs5,000-6,000 crore for state-owned oil marketing firms. Under-recovery is the difference between the cost and the sale price.
The crack spread for a fuel is the difference between its selling price and the price of the crude it is obtained from. GRM is a weighted average of these various spreads.
Average monthly crack spread for naphtha was -$20.40 a barrel in November, and -$2.40 a barrel for petrol —two components that had depressed GRMs in the December quarter and have buoyed margins in recent weeks. These have bounced back to $2.80 a barrel and $15 a barrel in the first week of February, according to Bloomberg data.
“Refining margins have improved sharply in recent weeks, led by expansion in product cracks which, in turn, were driven by a lower-than-expected build-up of product inventories as refineries carried out their annual maintenance earlier this year versus in previous years and cold weather in the northern hemisphere,” Kotak Securities Ltd analysts Sanjeev Prasad and Gundeep Singh wrote in a 10 February note, adding that the long-term outlook was subdued.
State and private refiners got a whipping the previous quarter on account of falling crude oil and fuel prices. Crude prices had fallen sharply by the time the fuels were churned from their refineries, leading to accumulation of high-value inventories and, subsequently, inventory losses.
The refining cycle for exports varies from 15 days to 75 days, depending on where the input is sourced and where the products are shipped to. Refineries are now processing cheaper crude and product prices have firmed up, lifting GRMs.
Kotak’s Prasad and Singh, however, say that the higher margins “need not necessarily translate into higher margins for Indian refiners” as the increase “has been led by sharp improvement in gasoline, naphtha and fuel oil cracks” while diesel margins have declined. State-owned refiners as well as RIL and Reliance Petroleum Ltd (RPET) produce a significant quantity of diesel, they said. “Diesel accounts for around 40% of a typical Indian refinery’s product.”
Industry experts say the higher margins are an aberration and not sustainable.
“Gasoline spreads have gone through the roof and won’t stay at those levels,” said an analyst at a foreign brokerage. “As RPET’s Jamnagar refinery and US refineries ramp up and newer facilities come up in China, they will again eat away these temporarily high margins.”
Graphics by Sandeep Bhatnagar / Mint