OIL REFINING INDUSTRY: Low Supply, High Demand Likely to Ensure Good Q4 Earnings Show

The quarterly results of domestic refiners are likely to be excellent, notwithstanding the rising trend in the crude oil prices witnessed throughout the quarter ended March 2011.
An extended winter till January and the Japanese earthquake in March ensured a strong demand for refined products, while the early year refinery maintenance schedules of European refiners resulted in supply staying low. This, besides the inventory gains on rising prices, pushed up refining margins in Q4 to their best levels in FY11.
The refinery marker margin benchmarks, as published by global petroleum giant BP, soared to $11 per barrel in the March 2011 quarter from around $4-5 in the first three quarters of FY11. “The regional benchmark, Reuters Singapore GRM, increased 35% Q-o-Q and 51% Y-o-Y to $7.3/bbl in 4QFY11,” noted a research report by Motilal Oswal.
The margin improvement has been especially good for middle distillates, such as diesel or gasoil, but has been stagnant for lighter products such as gasoline. “Refining margins for Dubai crude oil in Singapore gained support from the record-high middle distillate crack spread, which was able to more than offset the loss in the weaker naphtha and fuel oil cracks, and allowed refinery margins to show a sharp rise of $0.8 per barrel in March,” wrote OPEC in its monthly report for April 2011. Essar Oil’s results earlier last week underlined this trend. The company reported its highest-ever quarterly net profit of . 321 crore – up 78% on a Y-o-Y basis – on the back of a gross refining margin (GRM) of $8.15 per barrel. The profit for the last quarter was almost equivalent to its profits in the previous three quarters. At . 654 crore for the entire FY11, the company’s net profit recorded a 23-fold jump over FY10. Its other domestic peers are also expected to post similarly exciting results for the March quarter.
The market performance of the standalone refiners reflects this optimism. The scrips of Essar Oil and MRPL have gained nearly 10% so far in April, as against a flat Sensex. Chennai Petroleum, which is the smallest of the lot, also performed better than the market by gaining 3%. Although it derives its largest chunk of revenues from refining, Reliance Industries underperformed the markets mainly due to worries over its KG-basin gas output.