IOCL, BPCL, HPCL’s gross refining margins to remain in the range of $9 to $10 bbl: CareEdge

Varying the complexity of each refinery, Indian refiners produced healthy GRMs in Q1FY24 that ranged from $7 to $12 per barrel.

Brent crude once more crossed the $90/bbl threshold at the beginning of September 2023, after a gap of over nine months. Now that Russian crude can be bought under the $60/bbl G7 price cap, the difference between Brent crude, the international benchmark, and Urals, the flagship Russian commodity, has widened for Indian refiners, CareEdge Ratings explained in its report.

The Urals had typically traded below the $60/bbl price restriction imposed by the G-7, but in recent weeks, it has surpassed the cap and is currently trading at around $69/bbl. The proportion of Russian crude in India’s overall crude oil sourcing basket fell from over 40% since the start of the Russia-Ukraine war to 34% in August 2023 as a result of the spike in Urals oil prices.

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Any significant easing in crude prices in the near term is unlikely due to strong demand outlook, despite Saudi Arabia and Russia’s decision to cut their daily crude oil production by 10 lakh barrels until December 2023.

“In this backdrop, Indian refiners which are the key beneficiaries of cheaper Russian crude should still be able to clock GRMs of around $9-10/bbl in FY24 as the likely decline in their margins on processing Brent crude is expected to be offset by the significant expansion in margins on processing Russian crude which can even balance out the potential decline in supply of Russian crude in the near term. Also, with the onset of winter in Western countries, cracks for refined products are expected to improve from the existing levels, further helping the GRMs of Indian refiners,” said CareEdge Ratings in its report.

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The Covid-19 epidemic caused a significant drop in crude oil prices in FY21, and because of decreased demand and logistical difficulties, Indian refiners’ GRMs were also noticeably low. Following the recovery in demand after the pandemic, crude oil prices increased in FY22, which improved the GRMs of Indian refiners.

For Indian refiners, FY23 was an unusual year, nevertheless. They attained very high GRMs, which are mostly due to changes in demand-supply dynamics brought on by the start of the Russia-Ukraine war in February 2022. Geopolitical issues entered the picture, significantly improving India’s access to affordable Russian crude oil.

For about 85% of its total crude oil requirements, India depends on imports. Before the start of the Russia-Ukraine war, Russia made up less than 2% of India’s total imports. But because of the geopolitical consequences of this struggle, the proportion of cheap Russian crude oil in India’s overall crude oil supply increased significantly.

What is the road ahead ?

Given that retail prices of petrol and diesel are unlikely to follow the higher trend of Brent crude prices in the near future, a significant domestic demand for these fuels is anticipated in the short term. Aviation turbine fuel (ATF) will also be in high demand.

This approach is clear given that retail prices have not changed since April 2022, despite a drop in oil prices to $72 per barrel. Due to the ongoing disruption in the supply of natural gas from Russia to Europe, the arrival of winter is also anticipated to increase the export demand for refined products, particularly diesel.

“In Q1FY24, Indian refiners achieved healthy GRMs, ranging from $7 to $12 per barrel, contingent upon the complexity of their respective refineries. As we look ahead to the remainder of FY24, despite an increase in crude prices and potential constraints on the availability of Russian crude, GRMs are anticipated to remain within the range of $9 to $10 per barrel. This expectation arises from the anticipation of declining margins when processing Brent crude, juxtaposed with the anticipation of substantial margin expansion when processing Russian crude,” said Hardik Shah, Director at CareEdge Ratings.

Indian refineries processed 255.2 million metric tonnes (MMT) of crude oil in FY23, exceeding their 253.90 MMT total installed capacity. Strong domestic demand is mostly responsible for this overcapacity operation and for refined products from export markets.

In the past three years, Indian refiners have consistently achieved significantly higher GRMs than the benchmark Singapore GRMs due to the availability of fairly cheap Russian crude, limited global expansions of refining capacity, a sizable post-pandemic surge in refined product demand, and geopolitical disruptions. The credit profile of Indian refiners has improved as a result of this.

Also Read: Brent crude at $90/barrel as Saudi Arabia and Russia extend production cut

Updated: 12 Sep 2023, 12:41 PM IST