“Product market sentiment turned bearish in February, following disappointing demand for middle distillates due to weak economy and mild winter in the northern hemisphere. The continued recovery at the top of the barrel was outweighed by the increase in crude prices, causing refinery margins to fall,” mentioned OPEC’s monthly report of March 2012.
The widely tracked Singapore GRM had gained in January mainly on the news of Europe’s largest standalone refiner PetroPlus filing for bankruptcy and closing several of its units. It crossed $10 per barrel mark in early February, but fell to $6 per barrel owing to weakness in fuel oil, diesel and gasoline spreads. The situation is likely to worsen from hereon as more refining capacity is getting added globally. India Infoline wrote refining margins will continue to remain weak throughout 2012 “owing to incremental capacity additions in a scenario of weak demand, leading to supply-demand mismatch by a significant margin”. China and OECD are expected to add 0.6 mbpd and 0.8 mbpd of refining capcities, respectively, in 2012.
In India the 9 million-tonne HPCL-Mittal Energy refinery is nearing completion. BPCL-Oman Oil’s 6 milliontonne refinery was completed in June 2011. Essar Oil is also expanding its capacity from 14 million tonne to 18 million tonne.
This scenario will keep the earnings growth of India’s petroleum refiners under check. This will most prominently reflect in the performance of Reliance Industries. “…RIL’s FY13 earnings growth may be weak if its refining margins (GRM) do not improve,” concluded a recent report by BofAML. Its GRM had dipped to $6.8 per barrel in the December quarter, which the brokerage expects to fall to $5.4 - 6.7 per barrel in the March 2012 quarter.
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