In the March 2015 quarter, Indian refining companies benefited from strong refining margins. Gross refining margins (GRMs) were robust, thanks to refinery outages and a faster decline in crude prices than those of products.

The good news is that GRMs have remained firm in this quarter as well. So far this quarter, Singapore GRMs have averaged at $8 a barrel (see table). In comparison, the measure was at $8.4 per barrel in the March quarter. Note that the June quarter GRMs are better than the average of the last two financial years as well.

GRM is the difference between the total value of petroleum products coming out of an oil refinery and the price of crude oil.

One reason for the firm margins in the June quarter till now is the fact that gasoline cracks have been better.

Cracks refer to the difference between the price of crude oil and petroleum products extracted from it.

Relative to the March quarter, gasoline cracks have improved in the June quarter, while diesel/naphtha/fuel oil cracks are down, say analysts from Jefferies Equity Research.

Additionally, demand has been comparatively better and, as seen in the last quarter, there would have been some outages in this quarter, too.

Of course, this means Indian refiners can be expected to report strong GRMs in this quarter as well. Moreover, according to Jefferies, in addition to the strength in the benchmark Singapore GRM, the reported GRMs of refiners such as Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL), Indian Oil Corp. Ltd (IOCL) and Reliance Industries Ltd (RIL) are also expected to benefit from lower “fuel and losses" on account of lower crude prices. Fuel and loss refers to the cost that refineries incur due to the fuel consumed to run the refineries and the fuel lost in the system while processing crude oil into petroleum products.

“The PSU (public sector) oil marketing companies all reported GRMs in the range of $8-9 per barrel in 4QFY15 versus $2-6 per barrel historically—we expect BPCL/HPCL/IOCL GRMs to be in the $6-9 a barrel range in June quarter," said analysts from Jefferies in a note on 14 June, adding that they estimate RIL’s GRM in the first quarter FY16 to be close to $10 per barrel.

While investors would be happy with the favourable operating environment for refining companies, the outlook on the refining margins is not very bright. As Religare Institutional Research pointed out in a note last month, the refining margins are likely to be range-bound and average at $6-7 per barrel in 2015 as well, as incremental demand growth is well-balanced by capacity addition.

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