Record gross refining margins offset refiners’ losses

The squeeze in diesel supplies due to the Russia-Ukraine war has pushed benchmark Singapore gross refining margins (GRMs) to record levels, helping Indian refiners offset fuel-marketing losses, said executives and analysts. The margin between crude and the products–or cracks–extracted from it has scaled new highs, resulting in windfall profits for refiners such as Indian Oil, Bharat Petroleum, Hindustan Petroleum and Reliance Industries, they said.

This is positive for Indian refiners as almost 45% of their product slate is diesel. Diesel cracks have risen to $30 per barrel, up from $13-18 a year ago, while benchmark Singapore GRMs are at over $15 per barrel. Global diesel inventories are at a 10-year low and Chinese exports, a significant supply in Asia, were down 85% in the January-February period from a year earlier.

Futures Market Indications

GRMs are the earnings from turning crude into fuel.

“These are record diesel cracks and GRMs. Normally the GRMs are around $6-7 per barrel–this month it is over $20 per barrel,” said an oil marketing company (OMC) executive. “Overall, this quarter may see around $10 per barrel for most refineries. If this continues even for another quarter, refiners will recoup what they have lost in the last couple of months.”

According to analysts, with crude at $100 per barrel, petrol and diesel prices need to rise by Rs 9 and Rs 8 per litre, respectively, to maintain marketing margins of Rs 4 per litre. Over the last two weeks, petrol and diesel prices have gradually been increased to a total of Rs 8 per litre as of April 3.

Refiners have been raising prices after state elections got over in March. Russia invaded Ukraine on February 24. The refiners couldn’t be immediately reached for comment.

“As per our 4QFY22 till date estimate, marketing margins for OMCs are at negative Rs 0.6/litre for diesel and Rs 1.4/ litre for petrol,” B&K Securities said in a March 23 report. “We believe 4QFY22 earnings will be supported by higher Singapore refining margin of $8.4/bbl in 4QFY22 till date (+60% QoQ) and higher Brent crude oil price of $96/bbl in 4QFY22 till date (+20% QoQ).”

The futures market suggests higher gasoline, diesel and aviation turbine fuel (ATF) spreads could push GRMs to $12-13 per barrel over the next 12 months.

“The futures market currently predicts strong cracks for another three-four months and post which they start to recede to normal levels as markets settle down,” Antique Stock Broking said in a March 30 note. “Strong diesel cracks are positive for Indian refiners as almost 45% of their product slate is diesel and is helping to offset the losses in the fuel marketing business for the OMCs. Every US$ 1/bbl increase in GRMs helps offset Rs 0.5/ltr of loss in marketing margins.”

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