Refineries’ gross margin down 83pc in August

KARACHI: Gross margins of local refineries recorded the sharpest decline of 83 percent to $4 per barrel compared to $24 per barrel in July 2022, indicating poor profitability of the domestic sector on account of price hikes and surging inflation.

Farhman Mahmood, head of research at Sherman Securities said, “The global crude and product markets are showing a divergent trend as crude oil prices registered lower decline compared to product prices.”

He pointed out that where geo-political factors were driving crude oil dynamics, oil product market seems to be much bearish – driven by demand factors as consistent hike in oil prices, surging inflation and rising interest rates in major economies were affecting demand for global refined products.

Crude oil markets are in their transition phase and may follow product markets once demand side factors over-ride geo-political concerns.

Moreover, existing negative margin on gasoline may render global refiners in red spot, limiting downward pressure in gross refining margins (GRMs) by curtailing production, Mahmood said.

With local GRMs of $4 per barrel, refineries would not be able to recover processing cost and might incur losses from the ongoing month. “Company wise GRMs may vary depending upon the weightage of product slates in overall production and local refineries to operate in profits, industry GRMs need to settle above $6-7 per barrel,” the researcher shared.

Gasoline and diesel, which constitute around 70 percent of the product slate of local refineries, sharp decline in spread, price variance between these products and crude oil led overall GRMs to around $4 per barrel.

This is the first time after Covid-19 that spread between gasoline and crude oil turned negative.

That said, refineries have been making losses while processing gasoline during the ongoing month.

Last month, refineries were yielding spread of average $16 on every barrel of gasoline after demand for gasoline drastically reduced globally owing to record pump prices and rising inflationary concerns.

Moreover, spread on diesel which has highest weightage in local production slate, fell almost half from average $50 per barrel in July to $25 per barrel this month.

Average GRMs during last quarter of last fiscal stood at $23 per barrel – much higher than last 5-year average GRMs of $6 per barrel.

If GRMs improve to historic average of $6 a barrel, local refineries would be enjoying better earnings in local currency due to sharp devaluation of rupee versus the US dollar, Farhan believed.