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Robust product cracks elevate refining prospects

ICICI Securities 21 Apr 2022

What's Buzzing:

Oil marketing companies and standalone refineries are slated to achieve elevated profitability as product cracks surged again in April.

Context:

Global refining throughput increased YoY in Q4FY22. However, global petroleum product supply remains in deficit in comparison to demand, as per media reports. Tightened supply resulted in benchmark Singapore GRMs witnessing growth for a straight seventh quarter and it averaged US$8/bbl in Q4FY22. Currently, GRMs are trading in a range of US$16-20/bbl in April at multi-year highs.

Our Perspective:

For Indian refiners, gasoline, gasoil and jet fuel contribute 55-60% of refining yield. Media reports suggest a pick-up in demand and shortage of global diesel inventories led to surge in gasoil cracks and gasoil cracks are currently trading at elevated levels of US$30-40/bbl. Jet fuel cracks are also trending up amid anticipation of a further pick-up in international travel. This augurs well for Indian companies as higher cash flow will help de-leverage balance sheets. On the OMCs front, refining gains will offset any potential losses in the marketing segment. Key monitorable would be fluctuations in global demand (amid Covid-19 spread in China) and rising inflation. Geopolitical conflict in Europe will also weigh on global oil market as Russia is among the world’s top three crude and products supplier. In the near term, fundamentals of all refining sector companies in our coverage universe are expected to improve owing to gains accruing from the global refining scenario.

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