CareEdge Ratings expects the gross refining margin (GRM) of Indian refiners to moderate in the range of USD 6-USD 8/bbl with contracting discounts and lower product cracks, according to its latest oil refining report.
The decision of Russia and other OPEC+ nations to extend the voluntary cut in crude oil production by 2.2 million barrels per day till mid-2024 and geo-political factors including Middle-East disturbance, has somewhat limited the decline in crude oil prices in spite of sluggish global demand prospects, high interest rates and inflationary pressures. CareEdge Ratings expects the marketing margin to moderate on the back of a reduction in the retail price of petrol and diesel by Rs 2/litre implemented from mid-March 2024.
After recording an exceptionally high GRM in FY23 at an average of USD 16-USD 18 / bbl, the GRM of Indian Refiners moderated to an average of USD 10 - USD 12/bbl in FY24 which was largely in line with CareEdge Ratings expectations. This moderation was on the back of a narrowing discount on Russian crude along with a reduction in product cracks. GRM of Indian players, however, continued to remain reasonably higher than the benchmark Singapore GRM of USD 6.7/bbl for FY24 (USD 10.77/bbl for FY23).
“During FY24, India’s oil refining companies processed 261.55 million metric tonnes (MMT) of crude oil, surpassing their aggregate installed capacity of 256.82 MMT as on March 31, 2024 (vis-à-vis last year’s processing of 255.23 MMT on a capacity of 253.92 MMT as on March 31, 2023). This high capacity utilisation is primarily attributed to robust domestic and export demand for key refined products. The availability of relatively cost-competitive Russian crude, a substantial post-pandemic surge in refined product demand, and geopolitical disruptions leading to higher demand for Indian refined products from European nations have collectively contributed to Indian refiners consistently achieving significantly higher GRMs than the benchmark Singapore GRMs over the past four years ended FY24. Consequently, this has led to an improvement in the credit profile of Indian refiners,” said Richa Bagaria, Associate Director at CareEdge Ratings.
Despite moderation in GRM in FY24, the operating profit of oil players jumped multi-fold in FY24 over FY23 due to higher marketing margin. Even though average crude oil prices were reduced in FY24 from FY23, the retail price of Motor Spirit (MS) / High-Speed Diesel (HSD) was unchanged since April 2022 which resulted in a higher marketing margin in FY24. The marketing margin is expected to moderate substantially in Q1FY25 with the recent price cut for petrol and diesel from mid-March 2024.
“While FY23 & FY24 were exceptional years for Indian refiners, FY25 is expected to witness some normalcy with moderation in refining and marketing margins. Expected refining margin of $6-$8/bbl in FY25 with full utilisation of refining capacities are still expected to be decent when compared with pre-Covid years and it provides adequate headroom to absorb any potential shocks in marketing margin during the year,” said Hardik Shah, Director at CareEdge Ratings.
The crude prices are also on an increasing trend since the start of calendar year 2024 barring some reduction in between. Crude prices are expected to have an upward bias in the near term on the back of the strained situation between Israel and Iran. Accordingly, the marketing margin of OMCs is expected to remain under pressure in FY25.
