India’s sales of cars and especially motorbikes are forecast to rise rapidly, even as the development of a Delhi-Mumbai industrial corridor drives consumption of the country’s primary fuel products, diesel and gasoline.
The infrastructure programme for fiscal 2018-19 calls for more than 80,000km in new highways to better connect rural areas with urban hubs. Roads and other construction require oil-based products such as tar and plastic piping, and fuel to move materials by truck and rail.
“They (these projects) will have a cascading effect on fuel demand," said R. Ramachandran, director of refineries at Bharat Petroleum, adding that this would be reflected directly in strong refining margins.
India’s annual fuel demand, made up mainly of diesel and gasoline, is expected to grow 7.5% in 2018, according to a report by BMI Research, a unit of Fitch. That compares with 5.4% last year, according to government data.
“Strong fundamentals and rising demand in India indicate that refining margins will remain strong in the near term, for at least six months," Ramachandran said.
Refining margins also rely heavily on global crude oil prices, currently around $65 a barrel, and on the status of world inventories of refined products.
Indian refiners hope global prices will remain sub-$70 per barrel as world oil production rises while new refining capacity doesn’t keep the pace. The International Energy Agency said this month it expects oil production to slightly outpace demand this year, especially thanks to still rising output in the United States.
M.K. Surana, head of Hindustan Petroleum Corp. Ltd, said he expected international crude prices between $62 and $68 a barrel this year, as long as there are no geopolitical crises or technical disturbances like damage to the Forties pipeline.
Based on that expectation, India’s refiners should see refining margins, also known as cracks, in the range of $7-$8 per barrel for all three state-owned refiners.
“Products demand continues to rally on better industrial performance and weather-related support ... Rising oil prices have done little to dampen the growth so far," said Sri Paravaikkarasu, head of East of Suez Oil, at consultancy FGE.
FGE expects Singapore margins to hold around $6-$7 a barrels due to upcoming refinery maintenance and summer demand.
“The margins for Indian refiners will be slightly better ... as India prices its products on import parity basis," she said.
Asia’s benchmark margins in the oil trading hub of Singapore currently stand around $7.20 per barrel.
Cash for the coffers
Better refining margins for the state-owned refiners - and improved profit from selling retail fuel - will pump more cash into government coffers ahead of key elections this year and next for Prime Minister Narendra Modi, who needs money for his ambitious healthcare and infrastructure programmes.
The cash inflow would come just ahead of eight state elections this year and national elections in 2019. Healthy profits will also help the state-owned refiners to continue spending on expansion plans.
India aims to increase its refining capacity by 77% to about 8.8 million barrels per day (bpd) by 2030, which will cost dozens of billions of dollars.
State-run refiners Indian Oil Corp. Ltd, Hindustan Petroleum and Bharat Petroleum Corp. Ltd, that sell most of their output locally at prices linked to global rates, largely reported strong profits and margins for the October-December quarter.
While Indian gasoline and diesel prices are linked to global rates, during state or central elections private rivals say state-owned firms often do not increase retail selling rates - a risk to margins, analysts point out, only if crude prices suddenly spike.
“We expect margins to improve ... Cracks appear to be good," said B. V. Rama Gopal, head of refineries at IOC. Reuters