Mumbai: Higher than anticipated addition of capacity in 2019 may keep gross refining margins (GRM) of crude oil refiners suppressed for a few more months, said analysts. Against an incremental demand of 0.8mbpd (million barrel per day) an estimated 2.6mbpd of refining capacity came online in 2019.
GRM is what a refiner makes from turning every barrel of crude to fuel.
"In the absence of global recovery, we anticipate that GRMs would remain suppressed for a few more months in lieu of incremental refining capacity addition," said Motilal Oswal in a report today.
The report said Chinese teapot refineries have ramped up their utilization rate to 67% vis-à-vis 61% in October-November 2018 as the country increased crude oil import quotas for the former in 2019. "The higher capacity addition in 2019 is also a response to the higher diesel demand post-implementation of the International Maritime Organisation (IMO) norms 2020," it said.
IMO norms are tougher quality standards for fuel oil powering ships. Fuel oil, also called furnace oil, is a byproduct of crude oil distillation. It is used in ships, and for steam boilers in power plants and in industrial plants.
Under regulations issued in October 2016 by the IMO, ships must shift to fuel oil with sulphur content below 0.5%, effective January 2020, against the present 3.5%. This, it was believed, would help diesel cracks jump sharply giving GRMs a boost.
However, despite just 50 days left for the new IMO norms to kick in, diesel cracks have failed to revive in line with the expected $25-30 per barrel against $11 per barrel for November 2019 (year to date). During the second quarter of this fiscal, diesel cracks were at $14 per barrel.
"More importantly, the forward curve for diesel depicts an incapacitated scenario of a mere $14-$16 per barrel. "We believe that as low GRMs persist, higher cost refiners would close their operations and SG GRM would revert to the long-term average of $5-6/bbl," the report added.
Subdued refining margins also had an impact on the second-quarter earnings of domestic oil marketing companies (OMCs) - Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd.
Despite Singapore gross refining margins improving $3 per barrel quarter-on-quarter to $6.5 per barrel, OMCs witnessed weakness in core refining margin with IOCL and HPCL seeing a $0.5 and 0.2 per barrel decline, while BPCL posted a $0.5 per barrel improvement year-on-year, driven by shutdowns and likely higher crude costs.
Adding to their woes was a weak 2.2% year-on-year growth in industry fuel consumption, reflecting an abysmal marketing volume growth for OMCs.
Marketing margins, however, brought some cheer, growing at 3.2%, 8% and 18% year-on-year for IOCL, BPCL and HPCL respectively and supporting earnings.