Refinery Margins sharply recovered to US$14 per barrel in Sep

Refinery margins for local crude in the ongoing month have recovered sharply to US$14 per barrel after plunging to US$3 per barrel in August 2022 (the lowest monthly level of CY22).

According to an analyst report, GRMS may remain higher during the remainder of Sep as Middle Eastern Crudes fell sharply in the last few days and are trading below US$95 per barrel.

Thus, the reduction of product prices in the last couple of months is now weighing on crude oil prices.

The spread of HSD and JP led to a surge in overall GRMs Major reason behind the sharp recovery in GRMS is better to demand HSD and Jet Propulsion (JP) in the international markets.

This led to sharp recovery of spread on HSD (price variance between HSD and Crude) which increased to US$43 per barrel (incorporating 7.5% margin protection).

HSD is a major fuel for refineries which contribute on average 45% of the local production slate.

The price of HSD remained firm relative to crude since the product is also used as a heating fuel while the availability of other alternative heating fuels like Coal & LNG remained a concern in the short term.

Similarly, the price of Jet fuel remained higher due to better demand for the product during the peak holiday season, the impact of which came with a lag during Sep.

Thus, the spread on JP also increased to US$42 per barrel which also improved the overall GRMs of refineries. Just to recall, JP contributes on average 7% of the production slate of local refineries.

On the flip side, the spread on Motor Spirit (MS) or petrol remained negative at US$3 per barrel while the spread on Furnace Oil (FO) remained negative at US$37 per barrel.

MS contributes around 25% of the production slate while FO contributes around 18% of overall production.

Margins in 1QFY23TD

Average GRMs remained around U $13 per barrel Our working suggests that average GRMs during 1QFY23TD is around the US $13 per barrel which remained lower than average 4QFY22 GRMs of US $23 per barrel.

Thus, so far in the ongoing quarter, GRMs remained lower by 43 %QoQ but relatively higher than average GRMs of US $ 6 – 7 per barrel during the last few years.

Having said that, with the Pak rupee appreciating against the US Dollar, there are chances that the magnitude of exchange losses to remain lower in the ongoing quarter versus 4QFY22.

 Moreover, we may see slight inventory losses versus inventory gains in the previous quarter, said Sherman in its research report.

De -regulation & Refinery Policy

ATRL stands out as major beneficiary Refineries will support the deregulation pricing system as this will compel the government to support refineries for the upgradation project via the new refining policy.

It believed that till the refineries are upgraded by 2025, the government may opt for partial deregulation by abolishing IFEM on petrol and diesel.

Currently, OMCs are absorbing IFEM on diesel since the government is allowing Re 0 .21 per liter on the product while on Petrol IFEM is Rs 5/liter. Thus, in the present scenario price of HSD will increase while the impact on petrol will be a mixed bag.

Our estimates suggest that Attock Refinery (ATRL) will be a key gainer of deregulation due to its location which will compel ATRL to pass on any adverse GRMs to OMCs since prices may go up in the northern areas after deregulation, it said.

Moreover, the company will also benefit from Attock Petroleum since the company has a stake of 22 % in the company and receives hefty dividends (APL operations to improve also after deregulation).

Moreover, with net cash of US $76mn (Rs139/share), ATRL will easily embark on the deep conversion project which cost around US $500mn as per the company estimates.