The gross refining margins (GRMs) of petroleum products will weaken in the absence of inventory gains, while crack spreads will have a downward bias in the financial year 2017-18, says India Ratings and Research. The products crack spread, which is the difference between wholesale petroleum product prices and crude oil prices, is estimated to remain under pressure, on the back of the fragile global demand growth amid net capacity additions in FY18.
The Chinese and the U.S. export volumes are likely to remain high so as to maintain utilisation levels. In 2016, China’s diesel exports increased by 115 percent to 15.4 million tonnes, while consumption declined by 5 percent to 164.7 MT. Indian refiners’ production has a larger mix of middle distillates and hence it has an important bearing on overall margins. The agency expects the rally in crude oil prices to fade and price to remain in a narrow range in FY18.
India Ratings had highlighted in the report ‘India Ratings Maintains Stable Outlook on Oil and Gas Sector for FY18’ that Indian refiners’ GRMs will decline in FY18, from the highs seen in FY16 and FY17, driven by two factors:
inventory gains remaining low in FY18, given the crude price assumption at $55 per barrel and
the crack spreads between petrol and LPG moderating in FY18 from the highs seen in FY16 on the back of a higher demand.
The products cracks have remained under pressure in FY17 with Gasoil, Gasoline and JetKero crack declining by 10 percent, 34 percent and 18 percent year-on-year. However, the reported margins were masked by inventory gains with recovery in crude prices. Indian refineries benefited from substantial inventory gains on the back of a rally in crude oil prices (Arab heavy) touching $51.7 per barrel in December 2016, up 26 percent year-to-date, before declining to $48.5 per barrel at the close of the year. Similarly, Brent prices inched up to an average of $58 per barrel in December 2016 up 16 percent year-to-date before declining to $53 per barrel by close of the year March 2017.
In FY18, domestic GRMs are also expected to be impacted with higher cost of energy due to higher feedstock prices. Volatility in crude prices and currency may also have a moderately negative impact on the margins. However efficiency-led gains, strong dollar against most currencies and refinery shutdowns in the region may bump-up the margins temporarily during the course of the year.
The agency expects the Indian petroleum refineries to continue reporting strong GRMs in the fourth quarter of FY17, on the back of stable product cracks and modest inventory gains.
The Singapore Dubai-Fateh netback margins stood at $6.3 per barrel up 11 percent compared to $5.7 per barrel in the third quarter. Singapore Dubai Gasoline cracks improved by 29 percent quarter-on-quarter to $12.0 per barrel, while Gasoil and JetKero crack weakened by 6 percent and 13 percent respectively. The benchmark Singapore GRMs are excluding the inventory gains as such the strength in the GRM will also be underpinned by inventory gains. In the fourth quarter, the average Arab Heavy crude oil and Brent crude oil are up by 9 percent and 2 percent quarter-on-quarter respectively. Domestic petroleum product prices are linked to import parity or trade parity prices with reference to Singapore benchmarks.
The agency rates Indian refiners namely, Reliance Industries Ltd. (RIL; ‘IND AAA’/Stable), Hindustan Petroleum Corporation Ltd. (‘IND AAA’/Stable) and Indian Oil Corporation Ltd. (‘IND AAA’/Stable). The agency estimates RIL’s FY18 GRMs to remain stable at $10 per barrel-$10.5 per barrel, helped by efficiency gains, compared to $10.3 per barrel-$10.8 per barrel during the first nine months of FY17. For public sector units (PSU), GRMs are estimated in the range of $5.0 per barrel-$6.0 per barrel, lower compared to $5.5 per barrel-$7.0 per barrel achieved in the first nine months.
The agency expects working capital requirements to also inch up with lower Iranian crude oil procurement mix, which refiners benefited from the higher credit period during the last few years, and higher average raw material and output prices. PSU refiners will continue to have strong capital expenditure in FY18 and FY19, incurred on all 3Cs that is capacity, configuration and complexity. Hence India Ratings expects PSU refiners’ credit metrics to moderate in FY18, from the levels of FY17. However, the deterioration is credit neutral as the PSUs credit benefits from linkages with the state and RIL benefits from its strong business profile, robust cash flows and financial flexibility. Riley Dixon Authentic JerseyShare This