REFINING : Q3 to ride high, but margins likely to soften

THE last couple of months have been good for the refining industry globally, with margins improving due a spike in demand amid stagnant supply. This may boost the industry’s December quarter numbers. However, the buoyancy appears temporary.
During the September quarter and so far in the December quarter, demand for oil rose in the 34 economically advanced countries that are part of the Organisation of Economic Cooperation and Development (OECD). On the other hand, the global refinery throughput actually came down due to maintenance shutdowns, production cuts induced by low margins, and the industrial unrest in France. A strike in the Fos and Lavera oil terminals in France for most of October forced the temporary shutdown of more than 1 million barrel per day (mbpd) of refining capacity. This reduced the OECD refinery throughputs from 37 mbpd
in September to 34.6 mbpd in October. The global refining throughput fell by 2.3 mbpd in this period. These problems had resulted in supply stagnation in Europe, and as a result refiners all across the world witnessed improvement in their margins.
“In October, due to the tight situation of products in Europe, gasoline and distillate stocks dropped, causing a recovery of the gasoline crack in the US, which, in combination with stronger distillate demand on both sides of the Atlantic, allowed the US to protect its refining margins,” an OPEC report said. Cracks represent individual product’s profitability over the crude oil, while the gross refining margins (GRMs) represent the differential between the cost of a barrel of crude oil and revenues from sale of all petroleum products produced from it.
In its December 2010 report on the Indian oil sector, Edelweiss said there was a sustained improvement in the refining margins of domestic firms in November.
These higher GRMs are likely to witness pressure in the coming months as the fundamental demand-supply imbalance will prevail. The outlook on global oil demand recovery in 2011 remains mixed with the large economies of US, Europe and Japan stagnating. Also, an estimated 6 mbpd refining capacity will be added steadily through 2015. In a webcast with investors earlier this week, the refinery head of petroleum major LyondellBasell, Kevin Brown, said that the refining margins are likely to remain flat “over next several years”. This may not be strictly true for Indian refiners, but investors should be wary of the global economic recovery in the coming quarters before investing in this industry.