After two strong quarters, the benchmark Singapore gross refining margins (GRMs) have slumped so far in the current quarter.

A view of Reliance Industries’ Jamnagar refinery. File photo.

Analysts from Emkay Global Financial Services Ltd pointed out in a note last week, “Benchmark Singapore refining margins declined month-on-month from $7.6 a barrel in October to $5.42 a barrel in November 2011 led by slump in gasoline cracks."

Gasoline cracks were affected on account of a weak global demand. In fact, GRMs were quite weak in the second half of November. According to Emkay, average GRMs fell to $3.95 per barrel in the second fortnight last month.

Most analysts do not expect any drastic improvement in the scenario this month and maintain that the benchmark Singapore GRMs are likely to be lower on a sequential basis.

To that extent, Indian refining companies are expected to be affected in the current quarter. The Indian companies that are likely to be hit include Reliance Industries Ltd (RIL), Essar Oil Ltd, Chennai Petroleum Corp. Ltd, Mangalore Refinery and Petrochemicals Ltd and oil marketing companies (OMCs) such as Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd.

The fall of the rupee against the dollar is expected to offset some of the adverse impact of lower GRMs for RIL. On the other hand, rupee depreciation does not augur well for the oil marketers as it leads to an increase in gross under recoveries for the sector as a whole.

Therefore, a correction in the international crude prices would offer some relief for OMCs.

“Diesel and jet fuel (46% of RIL’s product slate) cracks to date in 3Q are strong at $18.8-19.8 per barrel with cracks in the last week being $18.0-18.9 per barrel. If diesel and jet fuel cracks remain strong and light distillate cracks and light-heavy crude spread were to recover, RIL’s GRM would recover," wrote analysts from Bank of America Merrill Lynch in a note to clients on 28 November.

If refining margins continue to be weak in December as well, the average margins for the quarter would get affected, which will reflect in the financial performance of the oil refining companies.