KARACHI: Local refineries are now yielding better gross refining margins (GRM) on the processing of crude oil, thanks to an improving spread on diesel and furnace oil (FO).
In January 2025, the industry GRM is approaching $8.5 per barrel, marking the highest GRM in the past 10 months. In contrast, the lowest GRM was recorded at $1 per barrel in June 2024, according to sector analysts.
Industry GRM is the combined weighted average spread of all products refined by major refineries in Pakistan, including petrol (MS), diesel (HSD), jet fuel (JP) and furnace oil (FO). The spread refers to the difference between the price of refined products and crude oil.
The spread on diesel (HSD) has now reached $20 per barrel this month, the highest level in the last 10 months. This increase is attributed to extreme cold weather in the US and Europe, which has raised demand for heating oil, along with news of potential further sanctions on Russian oil supply, analysts suggest.
Another factor contributing to the rising GRM is the improvement in furnace oil prices relative to crude oil. Over the past 10 months, crude oil prices have fallen by 10 per cent, while FO prices have remained nearly unchanged. This has led to a significant improvement in the spread on FO, which bodes well for National Refinery Limited (NRL) and CNERGY, both of which have the highest share of FO and HSD in their product mix.
“We expect the earnings of local refineries to rebound in the second quarter of FY25, after being depressed in the last two quarters,” said Farhman Mahmood, sector analyst at Sherman Securities. He anticipates that the average industry GRM will remain around $5.5 per barrel during the second quarter of FY25, reflecting a 30% quarter-on-quarter increase. However, company-specific GRM may vary depending on the product mix and crude grade.
Mahmood added that the signing of upgrade agreements under the New Refinery Policy is in progress and may take another 1-2 months.
He also noted that the signing of upgrade agreements with refineries will occur after the deed of settlement with the federal government, once the sales tax issues are fully resolved. The last deadline set by the SIFC for signing the upgrade agreements was January 7, 2025. Ogra, the Ministry of Energy (Petroleum Division), the Ministry of Finance, FBR, and other departments are continuously engaged with refineries to resolve the sales tax issue. Refineries were granted interim relief to claim sales tax from IFEM, but the modalities for covering these sales tax claims are yet to be notified, according to Mahmood.