A Spike In Benchmark GRM Offers Little Relief To BPCL, HPCL, Indian Oil
A benchmark of profitability for crude refiners has spiked in the past few weeks but it doesn’t offer much reason to cheer.
The Singapore-Dubai Hydrocracking refining margin hit a 26-week high of $1.75 a barrel on Aug. 31, according to Bloomberg data. It’s currently at $1.35 per barrel compared with an average of $0.8 so far this year.
The Asian benchmark—a measure of how much a refiner makes by turning a barrel of crude into finished products, or the difference between total value of petroleum products that come out of an oil refinery (output) and the price of the crude oil (input)—has averaged at $0.95 a barrel so far in the second quarter of FY22, up 23.2% sequentially.
But a lower demand for diesel limits room for benefit from the spike in the benchmark GRM. “With diesel accounting for close to 40% of the refining product slate in India, it remains the major influencer of the gross refining margins of domestic refiners,” ICRA Ltd. said in a report.
Data available on Petroleum Planning & Analysis Cell showed that demand for diesel and petrol, which together account for more than half of oil consumption in India, in the first eight months of 2021 was 10.6% and 1.1% lower, respectively, than during the corresponding pre-Covid period two years ago. Also, the aggregate consumption of all petroleum products for the period was 7.2% less than the January-August 2019 levels.
Lack of relief from the surge in refining margin in the quarter ending September, however, will be cushioned by the marketing segment.
The marketing margin—what oil refiners earn by selling every litre of fuel—jumped to Rs 3.1 a litre in the first two months of the second quarter compared with Rs 1.43 per litre in the April-June period, ICICI Securities said in a report.
That comes as the prices of petrol and diesel were cut only 0.3% and 1.1%, respectively, in August compared with a 15% drop in Brent crude during the month.
But the Asian benchmark for oil jumped back in September to more than $75 a barrel. While the crude price has risen 4.99% so far in the ongoing second quarter, it’s less than the 12.6% gain in the first three months, limiting inventory gains.
“Asian refiners benefited from inventory gains in the first half of this year because of higher crude prices, but such reprieve to earnings is unlikely to be sustained,” Moody’s Investors Service said in a report.
Early estimates available on Bloomberg indicate that the aggregate net profit of the three oil marketing companies—Hindustan Petroleum Corp., Bharat Petroleum Corp. and Indian Oil Corp.—are expected to decline 29.8% sequentially to Rs 6,488 crore in the July-September 2021 period.
BloombergQuint awaits responses to emailed queries sent to HPCL, BPCL and IOC on Monday afternoon.
Benchmark GRM Spike May Not Sustain
The recent jump in refining margin, according to ICICI Securities, is the result of Hurricane Ida, which impacted the oil and petrochemicals output of the U.S. refineries. “As refineries restart, GRMs are likely to correct. Already 1.3 million bpd (barrels per day) capacity refineries out of the 2.3 million bpd shut by Ida have restarted, though these refineries may take some time to fully ramp up to pre-Ida levels,” the brokerage said.
Jefferies sees a sustainable GRM recovery only in mid-2022. “The global demand needs to reach pre-pandemic levels in order to hit the pre-pandemic utilisation rates necessary for a revival in margins to the cyclical average,” the research house said in a report.
ICRA, too, expects the demand for global petroleum products to remain below the pre-pandemic levels till 2022. “The GRMs are expected to improve from the current levels but remain subdued.”
Besides, demand risks fuelled by resurgence in Covid-19 cases in the U.S. and China in the past few weeks are likely to hurt GRMs.
International Energy Agency has cut its global oil demand projections for 2021 by 110,000 bpd. It sees oil demand growing worldwide by 5.2 million bpd in 2021, it said in its September report. Mobility restrictions imposed by China and a few other Southeast Asian nations are another factor for a reduction in overall demand forecast.
ICICI Securities said the pace of global refined products demand recovery is key to GRM outlook. “Demand recovery would depend on Covid cases trend globally in general and large oil-consuming markets in particular.”