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MUMBAI : Refining margins have risen for the first time since the pandemic and with travel picking up and China pushing energy intensive industries to reduce emissions, analysts see refining margins strengthening for Reliance Industries Ltd (RIL).

As China tightens supervision of projects high on energy consumption and carbon emissions, its refining industry saw refinery throughput hit a 15-month low in August. Diesel exports from China had slumped 80% from the June quarter average by August and are projected to stay depressed in September. With more than 50% of its refinery slate (capacity) in diesel, analysts see RIL as a beneficiary.

“RIL’s refining profitability has improved sharply. If these elevated margins sustain till the Winter Olympics in February, RIL’s refining profitability could improve by $ 0.8bn over 2HFY22 estimated," said Jefferies in a report dated 11 October.

Jefferies added that it sees a 10-12% upgrade to RIL’s O2C (oil-to-chemicals) Ebitda in FY22E if China sticks to climate goals. Ebitda is earnings before interest, taxes, depreciation and amortization and is used as a measure of profitability. “We see potential for 10%-12% upgrade to consensus estimate of O2C Ebitda if China doesn’t go back on its climate goals in FY22E," it said.

China, which will hold the Winter Olympics in February 2022, has decided to cut down on emissions and control power usage. This move has roiled the commodities market.

China’s National Development and Reform Commission has tightened the supervision of projects high on energy consumption and emissions, while its ecology and environment ministry has proposed to include the refining and petrochemical belts of Shandong, Shanxi, and Hebei in its widening campaign to improve air quality over the winter months of October-March.

RIL’s gross refining margin is expected to rise by $0.5 per barrel to $7.3 per barrel sequentially in Q2FY22 as its refinery utilization rates normalize up to 105%.

“Refining margins, especially diesel, should rise further as global demand recovery and gas to oil switching for power generation/industrial fuels (because of higher gas prices) has led to diesel cracks rising above $10 per barrel, and reduction of diesel inventories has supported higher jet fuel cracks at $14 per barrel," said Morgan Stanley in a report dated 11 October. With overall oil demand expected to pick up after the monsoon, coupled with the upcoming festive season, and an improving economy, analysts expect fuel consumption to grow.

“India’s oil demand for full year 2021 is forecast to grow by 295,000 barrels per day to 4.9 million barrels per day, which would be still well below 2019 demand levels. India is expected to reach the pre-pandemic level of oil demand only in 2022," said Platts Analytics.

India’s sharp revival in gasoline appetite has prompted the country’s refiners to increasingly queue up to import lighter crudes in recent months, it said. The fourth quarter, however, could see a tilt in favour of heavier grades as gasoil demand growth is expected to pick up speed.

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