Main beneficiaries of addiction as refining margins soar

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NEW DELHI : Asian refining margins soared as crude oil trades at high levels, leading to windfall gains for oil refiners. While Indian refiners across the board gained, one of the main beneficiaries was energy giant Reliance Industries Ltd, which won several profit increases and whose shares outperformed benchmarks.

According to Moody’s Investor Services, the Singapore-Dubai hydrocracking spread averaged a multi-year high of $39 a barrel in the week ending June 24, nearly 20 times the 2021 average of $2. Refining margins are at super-cycle levels due to a shortage of transportation fuels as demand outstrips supply in Asia, Moody’s said.

The rebound in demand for automotive fuels following the easing of covid restrictions has pushed gross refining margins (GRMs) higher. Sanctions squeezed supplies from Russia, following major refinery shutdowns during the pandemic, further inflated them. The mismatch between demand and supply has led to higher gasoline, diesel and jet fuel margins, Moody’s added.

Total operational refining capacity in the United States fell by 509,000 bopd (barrels of oil per day) in 2021, following a decline of 422,000 bopd in 2020, Haitong Securities said. Weaker margins during the pandemic and higher costs led to a sharp drop in capacity, erasing the capacity additions of the past five years, analysts said. Also due to a production quota, Chinese refining throughput remains under pressure.

The boom in GRMs has improved prospects for Indian refiners. Major oil refiner Reliance Industries Ltd received upgrades from several overseas brokerages as its stock outperformed broader indices.

Other beneficiaries of higher margins include oil marketing companies (OMC) Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOCL). Although OMC continue to face headwinds from high crude prices and pressure on marketing margins, they still get some cushion to their profits from firm refining margins.

“Multi-year inventories, lower Russian exports, lower Chinese exports, lower diesel production in Europe and delays in commissioning ME refineries are, in our view, tailwinds for refining margins. in CY22,” Jefferies India Ltd said in a report. Early estimates suggest RIL could deliver 60% sequential growth in EBITDA O2C (petroleum to chemicals) in 1QFY23 with the likelihood of earnings improvements, Jefferies added.

Other brokerages also say RIL stands to benefit hugely from strong refining margins and gas prices.

“Our EBITDA/EPS estimates are 8%/4% higher than consensus estimates for FY23/24 and may potentially see further upward revision based on global refining margins in FY23 “, said analysts from Haitong Securities. They expect the full EU phase- of Russian petroleum products in the next 6-8 months, US refinery shutdowns and increased use of fossil fuels to counter cost inflation to continue to Supporting GRMs Although analysts expect product cracks to decline over the period from current levels, they expect them to remain significantly above the past five-year average.

JP Morgan Asia Pacific Equity Research also raised the ratings of Reliance Industries Ltd. According to them, RIL is among the few major Indian companies to have a positive earnings review cycle ahead, given the strong refining and gas environment. “Our upgrade to Over Weight is driven by an overall view of a strong refining environment, although we are incorporating a decline in product cracks from current levels; and, valuations of RIL’s non-energy business continue to hold up,” JP Morgan analysts said.

Meanwhile, the financial performance of India’s state-owned refining and marketing companies – BPCL, HPCL and IOCL – although supported by firm refining margins, are expected to remain weak as long as their net realized prices for gasoline and diesel are lower than those on the international market. price, analysts said.

However, Moody’s Investor Services added that it does not expect this situation to continue. They expect the Indian government to eventually allow fuel retailers to adjust selling prices, but price increases will be implemented gradually.

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