Singapore: Asian oil refining earnings may fall in the next few years as new processing plants start operations in India and China, Goldman Sachs said.
The benchmark complex refining profit in Singapore, Asia’s biggest oil trading centre, may fall to $6 (Rs262 today) a barrel in 2009 and $5.50 in 2010, from $9 this year, Goldman’s India-based analysts Nilesh Banerjee, Karthik Bhat and Durga Dath said in a report on Thursday, without giving earlier estimates.
Global glut:The Bharat Petroleum refinery in Mumbai. Global demand for fuel will not keep pace with increasing refining capacity. Photograph: Punit Paranjpe / Reuters
Supplies of petrol, diesel and jet fuel would increase, pushing refining margins lower, with about 2.5 million barrels per day (mbpd) of new capacity being added globally between 2008 and 2009, the analysts said.
Spare refining capacity would then increase as global oil demand would only rise by 1.5 mbpd in the same period, they said.
Reliance Petroleum Ltd, a unit of India’s Reliance Industries Ltd, is scheduled to start its refinery in the fourth quarter, and two PetroChina Co refineries would also begin operating in the second half of this year, the Goldman analysts said. CNOOC Ltd would be starting a new plant in the fourth quarter.
With the start of China Petroleum and Chemical Corp.’s Qingdao refinery in June, a total 1.3 mbpd of refining capacity would be added this year, the analysts wrote in the report.
“While the last leg of the refining up-cycle was driven by delays and cancellations,” new capacity mainly in China and India will add to output over the next 18 months.
“To make it worse, these capacities are likely to come at a time when global oil demand outlook is deteriorating, in our view,” Goldman said.
Goldman has lowered its world oil demand growth estimate to between 700,000 barrels and 800,000 barrels a day from 2008 to 2009, down from an earlier estimate of as much as 1.3 mbpd, according to the report.
Oil refiners would probably cut production as margins fall and supplies increase, and spare refining capacity would also rise, Goldman said. Global refining capacity growth would exceed demand growth every year between 2008 and 2010 even after adjusting for “doubtful additions and potential project delays”.
The potential for lower refining margins prompted Goldman to initiate coverage of Mangalore Refinery and Petrochemicals Ltd with a “sell” rating.
Goldman’s 12-month price target for Mangalore Refinery is Rs44, while current valuations imply “a much more bullish refining environment than our forecasts”, the analysts said.