Average refining margins jumped from $7.6 a barrel in Q1FY13 to $8 in the September quarter, due to refinery outages across the globe. As a result, Reliance Industries stunned analysts with gross refining margins (GRMs) of $9.5 a barrel in Q2FY13. This trend was largely expected to reverse in the third quarter, once refineries reopened. If margins for October and November are anything to go by, this is playing out already.
Benchmark Singapore refining margins have come off in October as spreads across fuel oil and high speed diesel have declined. October GRMs averaged at $8.6 a barrel compared to the $9 seen in September. GRMs in November are expected to average at $6.5 a barrel. Religare says refineries returning from maintenance or outages are adding to the pressure on spreads.
For FY13, GRMs are likely to be in the range of $8 a barrel. Oil and gas analysts say refining margins are trending down as demand stays muted and fresh capacities keep coming up. Singapore GRMs, which had ranged between $8.5 and $11 per barrel till 2008, have not touched these levels in the last few years, and now range between $5 and $8.5 a barrel. While margins for most products are under pressure, petrol margins are under maximum stress. According to Emkay Global, the refining cycle is expected to remain weak, with incremental net refining capacity additions expected to the tune of one million barrels per day (mbpd) in 2012 and 1.3 mbpd in 2013, as against demand growth of 0.8 mbpd in 2012 and one mbpd in 2013. Clearly, capacity additions will outstrip demand for refined products.
Despite recent developments in West Asia, Brent crude has not spiked, which indicates there isn’t demand for crude oil beyond the levels seen in October ($112/barrel). The International Energy Agency in its October update has cut incremental oil demand growth for 2012 by 0.1 mbpd to 0.8 mbpd, on account of the gloomy world economic scenario. Slowing demand and incremental refining capacity will keep the pressure on GRMs in the coming quarters.
The story is the same for petchem margins, too. Cracker margin or the spread between naphtha and downstream products like polyethylene, propylene and butadiene also fell sharply in October. Cracker margins are down from $62 in Q2 to $31 in Q3 so far. The main reason for the fall in margins is the decline in downstream prices. For Reliance Industries and other refiners in India, this isn’t good news.