Q3 Earnings: Analysts Expect Muted Recovery In Oil Firms’ Refining Margins
An oil refinery. (Photographer: Jonathan Alcorn/Bloomberg)

Q3 Earnings: Analysts Expect Muted Recovery In Oil Firms’ Refining Margins

Refining margins of oil companies are expected to improve as they report the third-quarter earnings. But the recovery will be muted.

The benchmark Singapore gross refining margin improved in the three months ended December to $1.2 a barrel from $0.1 in the preceding quarter Brent crude rose 4.4% on an average to $44.6 a barrel. India’s oil demand also rose sequentially for the fourth straight month in December even as it remains below a year earlier.

The rebound in demand after one of the world’s harshest lockdowns caused the utilisation level at refineries to improve. Yet, that may not be enough. Increasing oil prices and falling spreads—the gap between input costs and output prices—will cap the improvement in GRMs or what refiners make by processing a barrel of crude.

One reason is that increasing oil prices will also push up the cost of running a refinery higher, and also increase losses from fuel lost during the refining process. Sequential decline spreads for petrol, diesel and naptha—high-value fuels that earn the better GRMs—will also hurt.

Global petrol cracks—gap between crude and prices of output fuels such as petrol, diesel, gasoline, fuel oil—have declined due to the second wave of Covid infections, reversing the rebound in demand, in the U.S. and Europe, according to ICICI Securities. Even in India, the consumption for diesel, the key fuel for bulk transportation and several industries, reversed in November and December. ICICI Securities expects Indian Oil Ltd.'s fuel costs and losses rise $0.5 a barrel sequentially in the third quarter.

Here’s what brokerages expect:

Kotak Securities

  • Refining margins will remain muted in the third quarter, albeit recovering gradually from trough levels in the previous quarter amid the demand destruction caused by Covid-19, Rusmik Oza, executive vice president, head of fundamental research, said in an emailed response to BloombergQuint.
  • The brokerage expects expects the industry's refining margins to have increased to $ 2.2 a barrel from $1.1 a barrel in the preceding quarter.
  • Recovery in jet fuel and kerosene spreads, along with seasonally strong LPG spreads, led to the recovery.
  • Margins on gasoline and diesel moderated sequentially.

Emkay Global

  • The core GRMs, excluding inventory gains, will be flattish but reported GRMs may fall sequentially due to lower inventory gains in the third quarter as crude oil prices rose lesser than in the preceding three months, according to Sabri Hazarika, senior research analyst told BloombergQuint over the phone.

ICICI Securities

  • The spreads for gas oil—more important for Indian refiners than the benchmark Singapore GRM—declined to multi-quarter lows.
  • While gasoline spreads fell after a recovery the second quarter, Jet fuel spreads rebounded due to a sequential increase in demand.
  • Increased capacity utilization is expected to improve operational efficiency, improving core GRMs. But they are expected to be subdued compared to the historical average.


  • The brokerage expects a marginal improvement in Reliance Industries Ltd.’s GRMs to $6 a barrel from $5.7 in the second quarter.
  • Refining margin gains in the third quarter were driven by higher fuel oil cracks that Reliance does not produce much.
  • Crack margins for key transport fuels remained weak in the third quarter.

JM Financial

  • Expects Indian Oil to report core GRMs at $2 a barrel vs -$1 in the second quarter.
  • Predicts Bharat Petroleum Corp.’s core GRM at $2 vs $1.5.
  • Sees Hindustan Petroleum Corp.s’ core GRM at $2.5 a barrel vs $2.8.

Refinery margins are likely to recover by mid-2021 due to decade-high refinery closures and demand recovery in the U.S. driving season as vaccination picks up, Jefferies said in a report, citing International Energy Agency’s forecast of an increase of 5.5 million barrels a day this year. Still, according to a Bloomberg report, global refiners have announced permanent closure of 2.25 million barrels a day of capacity by the end of 2023.

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