Domestic companies see gross refining margins nosedive in December quarter

More hit expected in March quarter

Indian refiners saw gross refining margins (GRMs) nosedive in the quarter ended December 2018, as inventory losses piled up. Benchmark GRMs also took a hit and are expected to remain weak for one more quarter.

For the quarter under review, GRMs for state-owned refiners more than halved from what they were a year ago. 

For private refiners like Reliance Industries (RIL), the hit was lower at 24 per cent. Mangalore Refinery and Petrochemicals (MRPL) was the worst hit with a negative GRM of $0.64 per barrel.

The reason for the fall in GRMs for domestic refiners is a combination of inventory loss and weak Singapore benchmark GRMs. However, the reason for pressure on global GRM benchmarks is less obvious. “Reported GRMs include inventory losses, which vary based on which refiner was holding how much inventory and what time during the last quarter. The variation will also depend on what is the spread for that specific refiner,” said an oil and gas analyst on the condition of anonymity.

The fall in crude oil prices seen in the December quarter led to those losses. The average Singapore refining benchmark for the quarter was at $4.3/bbl, against $6.4/bbl for the December 2017 ended quarter.

State-run Bharat Petroleum Corporation (BPCL) reported a GRM of $2.78/bbl for the December quarter against $7.89/bbl a year back. Others like Indian Oil Corporation saw a bigger hit at $1.15/bbl, against $12.32/bbl a year ago, while Hindustan Petroleum Corporation was at $3.72/bbl against $9.04/bbl a year back. RIL has an edge in terms of GRMs owing to higher refining efficiency and flexible trading activities to manage inventory losses.

Analysts expect more stress on GRMs going forward. “MRPL’s reported GRM at negative $0.64/bbl was hit by huge inventory loss. The outlook on refining margin has deteriorated due to likely sharp rise in refining capacity addition in 2019 and weak gasoline crack,” said analysts with SBI Caps Securities in a report. The analysts also cut their Singapore Dubai GRM assumption for the current and next financial year to $5.5/bbl from $6.8/bbl.

“Winter is generally a period where demand is higher, but that does not seem to be the case this time with global benchmarks, which is surprising. It is also difficult to put a finger to what is leading to it,” said the analyst quoted earlier.

For the Singapore benchmark, weak demand has been a concern and is likely to continue this entire year. 

“Singapore benchmarks are weak predominantly due to severe slowdown in demand in Asia. As significant refining capacity have been added in Asia in the last few years, such slowdown in demand has accentuated effect on GRMs. Margins are expected to remain under pressure throughout 2019,” said Debasish Mishra, leader energy, resources and industrial products at Deloitte in India.

With the benchmark GRM continuing to remain under pressure, certain analysts expect the March quarter to turn out to be worse, compared to the December performance.

The long-term outlook for domestic refiners, however, remains positive. “The International Maritime Organization (IMO) has revised its bunker sulfur regulations, which will be implemented from January 2020. This will result in higher gasoil and liquid sulphur fuel oil demand, widening of the lower and higher distillate differential. This will, in turn, result in strong GRMs in FY20/21 for Indian refiners who have higher share of middle distillates in their production mix,” analysts with HDFC Securities said in their note.