Singapore gross refining margins (GRM), a benchmark of profitability for Indian refining companies, declined for the June quarter, sequentially as well as year-on-year (y-o-y). The measure came in at $5 per barrel compared to $7.7 a barrel in the March quarter and $8 a barrel in the June 2015 quarter. Margins declined primarily on account of decline in gasoline product cracks. Diesel cracks, on the other hand, showed some sequential strength. Cracks refer to the difference between crude oil price and refined product price.

Gasoline cracks fell quarter-on-quarter (q-o-q) to $14.6 per barrel from $18-20 a barrel levels in the last four quarters, calculated Bank of America Merrill Lynch (BoAML). “Diesel cracks recovered to $10.3 per barrel from a six-year low of $9.1 per barrel in March quarter," pointed out BoAML analysts in their June quarter preview, adding that all other cracks were sequentially lower.

This trend would reflect in the Indian oil refining companies’ performance. They are broadly expected to report lower GRMs q-o-q. Reliance Industries Ltd (RIL) had reported a GRM of $10.8 a barrel for the March quarter. For the June quarter, brokerages expect the company to report sequentially lower GRM. Citi Research expects RIL’s GRM at $9.5 per barrel, while Edelweiss Securities Ltd pegs it at $10 a barrel.

This would be RIL’s first sequential drop in profit after tax after five quarters of consistently improving operating performance, attributable almost entirely to refining, pointed out analysts from Citi Research. However, RIL’s petrochemicals business is expected to compensate for the lacklustre performance of the refining segment. Investors will be watching out for commentary on telecom business too.

Inventory gains could help the performance of state-run refining and oil marketing companies—Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOCL). Analysts from Jefferies India Pvt. Ltd expect a weaker quarter for BPCL and HPCL (q-o-q and y-o-y) due to lower refining and marketing margins, though inventory gains should moderate the impact to some extent. However, IOCL’s GRM and earnings are expected to improve sequentially due to reversal of its high inventory losses in the March quarter.

Meanwhile, oil producing companies—Oil and Natural Gas Corp. Ltd, Oil India Ltd and Cairn India Ltd—could well see sequential improvement in price realization, given the improvement in broader crude prices.

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