Oil refining sector outlook subdued on higher under-recoveries

Agency expects oil marketing companies will close the current fiscal with high gross under recoveries on account of high crude prices

Rating agency Icra today painted a subdued outlook for the oil refiners in the near-term due to global capacity additions outstripping demand growth.

"Demand growth of crude oil is expected to remain anaemic due to slow recovery of the Euro zone besides slowdown in China and India though there are signs of a gradual global economic recovery. Therefore, we have a subdued outlook for the sector," Icra said.

The agency expects oil marketing companies would close the current fiscal with high gross under recoveries on account of high crude prices and the rupee fall in the earlier part of the fiscal.

It expects the gross under recoveries to come down, though still remain high, in FY15 from FY14 levels due to the monthly rise in diesel prices and if the rupee were to remain stable at the current levels.

According to K Ravichandran, Senior Vice President, Icra, going forward international refining margins are expected to remain subdued in the medium-term due to global refinery capacity additions outpacing demand growth.

Delays in commissioning of some proposed projects and closure of unviable refinery capacities may however translate to some upside in GRM levels over the medium-term.