Refining margins may have just peaked out

The gross refining margins (GRMs) of Indian refiners, which had soared to new highs in the last couple of years on global demand, appear set to climb down.

Going by experts, the benchmark Singapore GRM, to which India’s refining margin is linked, is likely to stay ranged around $7 a barrel of crude next fiscal, mainly because the incremental supply coming up next fiscal will be in excess of the incremental demand.

That’s well below $10-11 per barrel of crude companies like Reliance Industries and Essar Oil – the only private refiners in the country – earned at the peak.

The benchmark Singapore GRM is an average of the refining margins of all major Asian refiners.
Owing to the high complexity of their refineries, Reliance and Essar are usually able to clock GRMs $1-2 above the Singapore GRM, while the public sector refiners clock $2-3 per barrel less than the benchmark.

Signs of a decline in Singapore GRM may be in evidence already. Though it has averaged $1.9 per barrel so far this fiscal as against $1.77 in the comparable period the previous fiscal, the benchmark has broken above $7 just once – $7.92/barrel in October – compared with 14 times last fiscal. Indeed, the peak GRM last fiscal was a whopping $13.3 a barrel.

“We remain bearish on Asian refining and believe peak GRMs are now behind us,” analysts Vinay Jaising and Rakesh Sethia from brokerage Morgan Stanley in a report published on February 5.
An analyst with a leading UK-based brokerage said the world will add a demand of a million barrels a day in FY14, while supply will be a little more than that, keeping margins under pressure.

“Even India will continue to stay a refining-surplus country in spite of not adding any significant refining capacity in FY14,” said the analyst. He sees demand and supply at 150 million tonne per annum (mtpa) and 200 mtpa, respectively.