REFINING INDUSTRY: Rise in global stock,output to weigh

DESPITE the lacklustre performance of petroleum refining industry in the June quarter, the stocks of pureplay refining companies have started rising again. Crude oil prices have fallen nearly 10% in the past couple of weeks and refining margins across Asia are looking up. However, the improvement in refining margins appears a temporary blip in an otherwise bearish trend requiring the investors to be cautious on these stocks in the near future.

The shares of standalone refiners such as Mangalore Refinery, Chennai Petroleum and Essar Oil have gained between 2% and 10% in August 2010 so far, after a sombre show in July. The financial results of these companies had been disappointing with only MRPL managing to stay in the black as refining margins weakened.

The gross refining margins or GRMs — the differential between the cost of crude oil and sale proceeds of products made there from — have remained weak for nearly a year now. After dipping to a multi-year low level in the December 2009 quarter, the refining margins had witnessed a jump in the March 2010 quarter. However, the June 2010 quarter proved a dampener. The overall weakness continues.

The benchmark global indicator margins calculated by BP also show a weakness in refining margins till date in the third quarter of 2010 from the preceding quarter. However, refining margins in Asia appear to have improved to $2.56 per barrel from below $1 in the preceding two quarters.

This regional improvement in GRM can be attributed more to temporary supply disruptions rather than any strength in demand. Taiwan’s largest 540,000 barrels per day refinery underwent an unplanned shutdown due to a fire incident in the last week of July. Similarly, maintenance shutdown at a couple of refineries was prolonged such as the 230,000 bpd Cilicap refinery in Indonesia.

The summer driving season in the US, starting July, has encouraged refiners to increase capacity utilisation rates, which rose to a two-year high of 90.7% in the US. However, the inventories of refined petroleum products remain high globally, with substantial spare refining capacity, according to Opec’s latest monthly report on the oil industry. The refining industry is expected to remain bearish on continued ample stocks across the globe and high production levels.