Party may soon turn dim for refineries

As winter demand tapers, the situation could become worrying for refineries, as no significant increase in demand has been seen

With petroleum exports from India declining for the third consecutive month in October, the falling prices of petroleum products in the export market have become a concern for Indian refiners, especially those in the private sector. Analysts say globally, refinery margins have been one of the highest this year. But they add as the winter demand tapers, the situation could become worrying for refineries, as no significant increase in demand has been seen.

The fall in crude oil prices has outpaced the fall in the prices of products. “As a result, product cracks (the differential between the price of crude oil and that of petroleum products extracted from it) have risen sharply, leading to refiners in general enjoying their best margins in years. To take advantage of the stellar margins, refineries have either increased runs or postponed planned maintenance,” said Tushar Tarun Bansal, senior consultant and head of East of Suez Oil service, Facts Global Energy.

Struggling European refineries, too, had posted strong profits, he pointed out, adding the story was no different for Indian refineries.

For public sector refiners, however, the quarter ended September this year hasn’t been good. During that period, the gross refining margin of Indian Oil Corporation (IOC), the country’s largest fuel retailer, stood at a negative $1.95 a barrel, against $7.43 a barrel in the year-ago quarter.

The company reported a net loss of Rs 898 crore for the September quarter, compared with a net profit of Rs 1,683 crore in the year-ago period. “This was mainly due to an inventory loss of Rs 4,272 crore in the second quarter, compared with an inventory gain of Rs 4,635 crore for the corresponding quarter last year,” B Ashok, chairman and managing director of IOC, had said after the announcement of the company’s results. During the same period, the benchmark Indian crude oil basket declined from $111 a barrel to $95 a barrel.

As the increase in refinery margins globally has not been prompted by an increase in demand, when winter demand tapers, product cracks are likely to fall due to increased supply and lack of demand. “That should start to impact export refineries. However, until then, it is a good margin environment to be in,” said Bansal.

In the second week of November, diesel cracks in Singapore were eight per cent higher at $16.7, a 27-week high; at $13.4, petrol cracks were up 5.3 per cent.

Reliance Industries Ltd (RIL) saw its refinery margins fall to $8.3 a barrel during the September quarter from $8.7 during the June quarter; it was $1.4 higher compared to the year-ago period. “Due to an increase in global supplies, exports have been softer and are expected to remain subdued through the next few months,” said Tanu Sharma, associate director (corporates), India Ratings.

For private refiners in India, prospects in the domestic market have, however, improved. Following the decontrol of diesel and petrol prices, traditional export-oriented refineries can look at the domestic market as a potential outlet for their fuel. With the largest domestic refining capacity of 60 million tonnes, RIL is yet to revive its retail business.

At the peak of its petroleum retail business in 2005-06, RIL commanded a market share of about 15 per cent in the diesel segment and 7.3 per cent in petrol, with as many as 1,433 outlets across the country. Essar, too, had made significant inroads into the business. But with global prices touching new highs in 2008 and the revenue loss on diesel as high as Rs 14.5 a litre till September 2013, private companies kept away from the retail market. Now, even after the deregulation of petrol and diesel prices, private companies together own only about five per cent of all retail outlets in the country.