Local oil majors' gross refining margins soar

Maintenance shutdown of refineries in US, Asia seen as trigger.

Domestic oil refiners have seen an uptick in their gross refining margins (GRMs) over the past two weeks.

In the past fortnight, benchmark Singapore refining margins are estimated to have reached $8 a barrel compared with $6 levels in the December 2005 quarter and $5.5 levels in mid-February, according to analysts.

It is understood that Reliance Industries' (RIL) gross refining margins over the past fortnight have reached $10-10.5 a barrel compared with $9 levels in the December 2005 quarter and $8.75-9 levels in mid-February.

In the case of Indian Oil Corporation, GRMs are hovering at $6.5-7 a barrel levels compared with $5.5-5.75 levels in mid-February.

Analysts highlight several factors for the pick-up in margins over. Several refiners in the US and Asia have been shut in the past few weeks owing to annual maintenance.

In addition, Indian refiners have also leveraged the advantage of purchasing Brent, at $55-56 a barrel levels in mid-February. Oil refiners typically hold crude oil inventory for 28-35 days, say analysts.

The current pick-up in crude prices has also resulted in the spike in fuel prices globally, which also helps Indian refiners get better margins.

Meanwhile, domestic refining capacities are on a rise with HPCL and MRPL recently announcing refinery capex plans. Hindustan Petroleum Corporation (HPCL) is planning to raise the capacity at its Mumbai and Vizag refineries by 3.3 million tonne to 16.3 million tonne.

MRPL will also expand capacity from 9.69 million tonne to 15 million tonne. Total domestic refining capacity is pegged at 134 million tonne and it is expected to reach 154 million tonne in 2007.

The new capacities are coming up despite a surplus in domestic refining capacity. This refining surplus was estimated at 17.5 million tonne at the end of FY05, and is expected to increase to 33.4 million tonne at the end of FY06.

As a result, domestic refineries are expected to leverage enhanced refining capacity for export markets.

For instance, according to the US Energy Information Administration, American refineries have the capacity to process around 17 million barrels of oil a day against an average daily consumption of 20.6 million barrels.