“The stocks have gained on expectations of better margins and rightly so, as the US cyclone situation has forced shutting down of some of US refining capacities. With low crude prices, this will have a positive impact on Indian refiners,” said an analyst with a domestic brokerage firm who did not wish to be identified.
With the onset of winter expected soon, Indian refiners may continue to enjoy these margins even after the cyclone issue is resolved. It needs to be seen as an extended period of good margins this year, the analyst quoted above added.
According to a Reuters news report, at least 3.6 million barrels per day of refining capacity are offline in Texas and Louisiana, or nearly 20 per cent of total US capacity. Restarting plants even under the best conditions can take a week or more, the report said.
Edelweiss analysts led by Jal Irani, in a report on Monday, echoed similar views: “Disruption in the US Gulf coast refineries due to the fury of Hurricane Harvey
would likely benefit Indian refiners. The region, which constitutes about 45 per cent of USA’s refining capacity, has seen capacity shutdowns of an estimated one million barrels per day, with an additional one million barrels per day shutdowns expected going ahead (about 3 per cent of global refining capacity).
Consequently, US gasoline cracks have surged to $24 per barrel, 2x recent levels. Gasoline represents 12-15 per cent of India’s refining slate (second-largest component).”
US refinery shutdowns have led to a rise in Singapore gross refining margins (GRMs), the regional benchmark for Indian refiners. Analysts added that with Singapore GRMs witnessing an improvement of about $2 per barrel, a similar improvement can be expected in those of the Indian refiners for the same period. Quarter-to-date (since July 1), Singapore benchmark margins are quoting at record highs of $7.8 per barrel.
In terms of operational performance, RIL
is seen as well-positioned to gain from the current situation due to its higher refining efficiency and a speedy process to source crude oil from different geographies.
In terms of stock performance, analysts expect IOC
to be top gainer among the Indian refiners as it operates the largest refining capacity of 69.2 million tonnes. Among the four listed refiners, IOC
saw maximum gains in Wednesday trade.
Analysts do not expect much upside for RIL.
“Most of RIL’s gains have been factored in the past few months’ price rally. Besides, RIL’s refining capacity is relatively smaller,” said the analyst quoted above.
Higher GRMs also suggest that the good times for Indian refiners will continue. “We expect Indian refiners to extend their strong Q1FY18 performance in core GRMs in Q2FY18 as well,” Edelweiss analysts say.