Refiners Urged to Prepare for Decrease in Profit Margins Amid Oil Industry Shifts
Indian refiners are preparing for a dip in profitability this fiscal year as refining margins are anticipated to ease to $6-$8 per barrel, as per a report by CareEdge Ratings.
This follows a period of impressive earnings, with gross refining margins (GRMs) averaging $16-$18 per barrel in 2022-23 and $10-$12 per barrel in 2023-24. The margin compression is attributed to several factors: diminishing product cracks, especially for diesel, are eating into profitability. Moreover, the diminishing discount on Russian crude oil, a vital feedstock, is reducing the cost advantage.
Geopolitical tensions and production cuts by OPEC+ have restricted the anticipated decline in crude oil prices, further impacting margins.
Despite the expected decline, Indian refiners are anticipated to maintain a favorable position compared to the global benchmark.
GRMs are projected to stay above the benchmark Singapore GRM of $6.7 per barrel for 2023-24. This resilience is mainly due to the high capacity utilization achieved in 2023-24. Refiners processed 261.55 million tonnes (mt) against a capacity of 256.82mt. Strong domestic and export demand for refined products fueled the high utilization.
“The availability of relatively cost-competitive Russian crude, a substantial post-pandemic surge in refined product demand, and geopolitical disruptions leading to higher demand for Indian refined products from European nations have collectively contributed to Indian refiners consistently achieving significantly higher GRMs than the benchmark Singapore GRMs over the past four years ended 2023-24,” remarked Richa Bagaria, associate director at CareEdge Ratings.
“As a result, this has led to an enhancement in the credit profile of Indian refiners.”
However, the outlook for marketing margins is less upbeat.
The recent government-mandated price cut of ₹2 per litre on petrol and diesel is expected to moderate margins in the first quarter of 2024-25.
