The quarter ending September is expected to be good for Indian refiners like Reliance Industries, as many refineries across the globe have shut shop, temporarily. The Gulf of Mexico, which accounts for 44 per cent of refining capacity in the US, was struck by a hurricane earlier this week. This was followed by a fire at Venezuela’s Amuay refinery, due to which it, too, was shut. In a season in which demand for petroleum products is strong, these unexpected outages are positive for the refining margins of Indian refiners, as capacity constraints have raised margins.
Gross refining margins (GRMs), or the difference between crude oil prices and the total value of petroleum products, rose to about $10 a barrel in August, owing to buoyancy in product cracks across the board. According to analysts, gasoline cracks have been the most buoyant, with spreads averaging $18 a barrel, compared with $7 and $11 in June and July, respectively. Product cracks essentially represent the difference between the cost of crude oil and the final price of the processed products. Different refiners use different crude mixes and these determine their margins. For instance, refiners in Singapore buy Dubai crude oil, which is relatively more expensive, while Reliance Industries Ltd (RIL) has a more complex mix of crude oil, including Arab heavy crude oil, which is cheaper.
Analysts expect RIL’s GRMs to average between $7.6 and $8 for the entire year. However, GRMs in the quarter ending September are likely to be about $8 per barrel, higher than the $7.6 a barrel in the quarter ended June. This benefit is likely to be reversed in the quarter ending December, once refining capacities come on-stream. So, what does this mean for RIL? Prabhudas Lilladher says, “The current boost in the refining segment is temporary, and we would refrain from being positive on RIL. After the recent uptick in the RIL stock, we believe limited commodity-driven upsides and the absence of meaningful exploration and production news flow in the near term make the risk-reward unfavourable.”
Though Edelweiss Securities believes refining margins would moderate as refineries reopen, brokerages continue to be bullish on RIL. For starters, they believe outages mean RIL can supply to the Californian market. Edelweiss also believes rising fires indicate the industry capacity is ageing. It remains bullish on GRMs from a long-term perspective. While RIL’s prospects for the refining business may seem good, there are a host of issues the company needs to address in the exploration business. New discoveries and change in gas pricing would be bigger triggers than an uptick in GRMs.