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ICICI Securities Report
In calender year 2019, International Energy Agency estimated global net refining capacity addition at approximately 2 times refined products demand growth in CY19-CY24. It now estimates global demand to decline by 7.8 million barrels per day YoY (verses 1.2m b/d growth earlier) in CY20 due to hit from Covid-19 and CY21E demand to be 2.6m b/d lower than in CY19. Demand collapse meant Reuters’ Singapore Gross Refining Margins was in the red probably for the first time ever in a quarter in Q1FY21.
It appears GRMs would sustainably recover only if there are permanent refinery closures that boost utilisation rates to approximately 80% versus 73% in CY20 (lowest in 37 years). In the interim, low utilisation and overcapacity would mean lower GRMs and perhaps lower valuation for refining assets in BPCL privatisation. We still like oil marketing companies due to their likely strong auto fuel marketing margins.
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