India’s Oil Firms Shouldn’t Cheer Higher Refining Margins Just Yet

The benchmark Singapore gross refining margin—the amount an oil marketer earns by refining one barrel of crude oil—rose to the highest in six quarters to $1.8 a barrel from $1.2 in the preceding quarter. That came as Brent crude prices rose 36.1% quarter-on-quarter to $60.7 a barrel during the three months through March.

Prashant Vasisht, vice president and co-head of corporate ratings at ICRA Ltd., attributed it to improved fuel demand. “Some lift to the refining margins could be provided by inventory gains as crude prices have increased in the fourth quarter,” he told BloombergQuint over email.

Rising product spreads—or the price difference between the petroleum product and crude oil input—will boost GRMs in the fourth quarter, according to Probal Sen, oil and gas analyst at Centrum Broking.

“Product spreads of gasoline and diesel which constitutes almost 45% of Indian refiners’ products, have shown a smart recovery in Q4 by about $2.5 per barrel,” he told BloombergQuint over the phone. “The decline in spreads is witnessed in furnace oil and LPG but both don’t figure significantly in Indian refiners’ product list.”

Sen expects industry refining margins to improve by $2-3 in the fourth quarter.

But while oil marketers will witness inventory gains, Emkay Global expects their refining margins to remain low as a result of costlier crude from Middle East—a key oil source.

Urvisha H Jagasheth, research analyst at Care Ratings Ltd., said product mix and source of crude will influence GRMs in the fourth quarter, given Indian refiners are diversifying their supplies. Even as crude throughput and refinery utilisation have improved over the preceding quarter, oil prices have risen in the fourth quarter, she said.

That’s critical as crude oil comprises nearly 95% of raw material costs of refiners. Rising oil prices will lead to higher operational costs, impacting GRMs.

Falling Demand Threat

Benchmark Singapore GRMs rose to a record $3.18 per barrel on Feb. 19, but slid to $1.86 in March as global oil demand fell 0.8% sequentially in the fourth quarter, ICICI Securities said in a report. A surge in Covid-19 infections in Europe, slow rate of vaccination and a rise in U.S. refinery utilisation have been additional contributors, it said.

Lockdowns in Europe, according to the ICICI Securities report, will hurt demand and GRMs in the future. JM Financial, too, expects outlook for refining margin to remain subdued over the next couple of quarters amid uncertain demand recovery globally.

India’s energy demand may also fall. The oil and energy consultant FGE, according to a Bloomberg report, is expected to slash the country’s oil demand estimates for the second and third quarters of 2021, with significant downside risks if Covid-19 infections don’t abate. Consumption of key products, including diesel, gasoline, jet fuel and LPG would grow at around 30% year-on-year in the second quarter compared with 34.6% previously, the report said.