Key refining spreads, viz., high-speed diesel ($17 per barrel), liquefied petroleum gas ($25 per barrel), jet kerosene ($21 per barrel) and naphtha ($3.6 per barrel), averaged higher month-on-month in November as the decline in product prices lagged the fall in crude, according to a report from Religare Institutional Research.
Key refining spreads, viz., high-speed diesel ($17 per barrel), liquefied petroleum gas ($25 per barrel), jet kerosene ($21 per barrel) and naphtha ($3.6 per barrel), averaged higher month-on-month in November as the decline in product prices lagged the fall in crude, according to a report from Religare Institutional Research.

Crude oil prices crash but refining margins at a high

The drop in crude prices could lead to heavy inventory losses for some firms, say analysts

Crude oil prices have dropped at a much faster pace than the drop in product prices. US refining runs (or utilization) have been weak. Singapore gross refining margins (GRMs), an important benchmark, show an improvement to $7.4 per barrel for November. Singapore GRMs for the September quarter stood at $4.8 per barrel and for the month of October was $5.4 a barrel. GRM is the weighted average price of refined products less the price of crude oil, generally expressed in terms of per barrel of crude.

According to a report from Religare Institutional Research, key refining spreads, viz., high-speed diesel ($17 per barrel), liquefied petroleum gas ($25 per barrel), jet kerosene ($21 per barrel) and naphtha ($3.6 per barrel), averaged higher month-on-month in November as the decline in product prices lagged the fall in crude.

Needless to say, the improved refining margin environment augurs well for refiners. But there is a problem. Analysts anticipate the drop in crude prices to lead to heavy inventory losses for some firms. This could very well mean that companies will not be able to reap the full benefits of the improvement in margins for the December quarter. In any case, it’s not like the medium-term outlook for refining margins has improved.

“Refinery runs are expected to recover in November-December, putting pressure on GRMs, led by the start of (a) Saudi Aramco’s 400kbpd Yanbu refinery, (b) UAE’s 420kbpd Ruwais refinery, (c) Brazil’s 115kbpd Abreu e lima refinery and (d) Indian Oil’s 300kbpd Paradip refinery (early 2015)," Religare said in a note to clients on 8 December, adding that its outlook on GRMs remains unchanged and they expect an average GRM of $6-7 per barrel for CY14 (year-to-date $5.5 per barrel).

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