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India Oil & Gas, Chemicals
Feedstock- Vol XXIV: Spotlight on Refining
• Spotlight on refining: Refining margins have picked up, averaging
$5.37/bbl since December – building increasing optimism for a sustained
earnings boost post a difficult 18 months. In this note, we examine
trends and implications in the refining space.
• Moving on from ’09 lows…: Robust distillate demand, particularly east
of the Suez, along with better discipline among refiners during low
periods has contributed to creating a floor for margins.
• … But range bound in shallow waters: However, significant
overcapacity still exists in the system, and mothballed refineries could be
restarted at attractive margin levels. With heightened M&A activity in
the refining space, uncompetitive refiners could be tempted to stay in
operation in the expectation of a sale – thus capping margins.
• India will remain long refining in the medium term: The refining
industry in India should see significant capacity additions over the
coming few years, with over 1mn bbls/day of capacity to be
commissioned by FY15. We estimate an implied domestic utilization rate
of 88% in FY12 and 92% in FY13.
• LPG will stay short, Naphtha and FO long: We expect India to remain
net short of LPG over the coming years. Excess capacities for Diesel
built in FY12 will likely get absorbed in a couple of years. Increasing
availability of natural gas will keep Naphtha and Fuel oil excess elevated
over the medium term.
• Margin watch: Benchmark GRMs remained firm, averaging $5.37/bbl
since December (vs. $4.55/bbl in 3Q). Diesel spreads remained strong
($14.1/bbl), driven by strong demand in Asia, and coupled with the onset
of winter. Light heavy crude differentials widened to over $3.5/bbl.
• Fuel marketing watch: Brent has averaged over $93/bbl since
December, leading to a spike in potential marketing losses. While petrol
de-regulation continues to work, we estimate losses of ~Rs85bn this
month.
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