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A file photo of a Reliance refinery. The refining business is expected to continue to be a a major earnings driver for Reliance Industries. (A file photo of a Reliance refinery. The refining business is expected to continue to be a a major earnings driver for Reliance Industries.)
A file photo of a Reliance refinery. The refining business is expected to continue to be a a major earnings driver for Reliance Industries.
(A file photo of a Reliance refinery. The refining business is expected to continue to be a a major earnings driver for Reliance Industries.)

Why RIL’s GRMs could be at a premium to Singapore GRMs in Dec quarter

Complex refiners stand to benefit from marginal fuel oil production

What goes up must come down—that’s what happened with refining margins in the December quarter. Singapore gross refining margins (GRMs) averaged about $6.5 per barrel last quarter, down from $9.1 a barrel in the September quarter. But then, the September quarter was abnormal in the sense that the refining margins were driven more on account of shutdowns rather than an increase in demand. Obviously, since demand did not improve dramatically and refineries that were shut came on stream, margins had to correct. Correction in gasoline and fuel oil spreads are the main reasons responsible for the decline in GRMs.

What does this mean for Reliance Industries Ltd’s (RIL) December quarter financial performance? Margins should be affected. In the September quarter, the refining business accounted for as high as 56% of total earnings before interest and tax (Ebit). In fact, the refining business was the primary saviour for RIL in the first half of this fiscal year. Naturally, a weak refining environment in the December quarter will mean that the refining business need not be the star performer.

Still, it’s not as if the world has fallen apart for RIL’s refining business. For the December quarter, the refining business will continue to be a major earnings driver. What also offers comfort is that despite the fact that Singapore GRMs have declined, RIL’s GRMs are expected to be at a premium to them. “Though benchmark refining margins were weaker on a higher percentage of fuel oil in the slate, complex refiners (RIL and Essar Oil Ltd) stand to benefit from bottomless slate (meaning marginal fuel oil production) and a higher light-ultra heavy differential ($17 per barrel versus $12 a barrel in the September quarter)," Religare Institutional Research said in a December-quarter results preview.

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