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• 2010: the year that was, and a look ahead: In this note, we look
briefly at the key trends that impacted the sector over the past year, and
the possible direction these trends may take in the coming year.
• Crude: Crude has has averaged $79/bbl for 2010TD. With signs of a
steadier economic recovery, onset of winter, and continuing Chinese
demand, we expect the strength in crude to continue in the near-term.
However, there are risks to crude, with high non-commercial positions,
rising non-OPEC investments, high OPEC spare capacity and increasing
shale output along with potential govt/central bank policy actions.
• Subsidies and de-regulation: Announcement of de-regulation in autofuels was a key event for the downstream sector – though it is working in
parts, inflationary and political concerns loom, we expect a window for
further action only around June 2011, with ad-hoc moves till then.
Overall subsidy levels are likely to be higher than earlier estimated.
• Petrochemicals: Petrochemicals have seen divergent trends with supplyside pressures driving operating rates and consequently margins lower
for polymers – we expect capacity additions to work through the system,
with operating rates picking up in 2011. With cotton prices remaining
high, polyester margins remain strong – with potentially lower-thanexpected cotton output in India and low capacity adds, we expect the
polyester chain to remain robust in 2011, benefiting integrated players.
• Refining: Greater discipline among refiners has led GRMs higher than
the lows of 2009 – however, with overcapacity still in the system despite
~2.5mn bopd of shutdowns, we expect margins to remain rangebound,
and still significantly lower than the super-normal margins of 2004-08.
• Gas - We expect strength in the gas theme to continue into the new year
with completion of large pipeline capacity expansions, particularly in
North India, which would aid demand creation
• Margin watch: Benchmark GRMs remained firm, averaging $4.44/bbl
this quarter (vs. $4.2/bbl last quarter). Diesel spreads remained strong
($12.8/bbl), driven by strong demand in Asia, and coupled with the onset
of winter. Light heavy crude differentials widened to over $3.06/bbl.
• Fuel marketing watch: Brent has averaged $85.5/bbl this quarter,
leading to a spike in potential marketing losses. While petrol deregulation continues to work, we estimate losses of ~Rs83bn this month.
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