Refinery Profit Margins Fall Below 5-Year Average

Pakistan's oil refining sector is facing a sharp squeeze in profitability, with gross refining margins (GRMs) falling to regarding $11 per barrel in September from around $33 per barrel in August and below the five year average of $13.5 per barrel.

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• OGDCL, Mari and HUBCO Start Production From Joint Venture Gas Well In Sindh.
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• Nevertheless, actual crude premiums for September deliveries have risen to concerning $12 to $15 per barrel.
• Crude costs, including premiums, have rose concerning 27 percent since the end of August for Pakistan's import based refineries.
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According to a Sherman Securities research report, the decline has been driven mainly by a $12 to $15 per barrel growth in supplier crude premiums for September and October deliveries against the backdrop of security reservations linked to the US Iran conflict.

For context, the higher crude costs have significantly reduced the effective margin on high speed diesel (HSD). While the formula includes a negative $1.5 per barrel crude premium and $8 per barrel freight, under the existing pricing formula, refineries are allowed a spread of $41.89 per barrel over Dubai crude.

Nevertheless, actual crude premiums for September deliveries have risen to concerning $12 to $15 per barrel. Assuming Arab Light crude at $95 per barrel, the landed cost rises to regarding $115 per barrel after adding the premium and freight.

With HSD selling at regarding $148 per barrel, the effective diesel spread is therefore around $33 per barrel, well below the $41.89 per barrel spread provided under the pricing formula.

Sherman Securities remarked the administration should reconsider the diesel pricing mechanism by either incorporating the actual crude premium of $12 to $15 per barrel instead of the negative $1.5 per barrel at present employed in the formula, or removing customs duty on HSD.

Furnace oil is creating another major drag on refinery margins. While crude costs have rose sharply, high sulphur furnace oil costs have remained around $76 per barrel. Consequently, the negative furnace oil spread widened to regarding $39 per barrel in September from $15 per barrel in August.

Crude costs, including premiums, have rose concerning 27 percent since the end of August for Pakistan's import based refineries. Petrol margins have additionally weakened, with the motor spirit crack spread falling to concerning $14 per barrel from an August average of $27 per barrel. While the underlying crude cost was estimated at concerning $116 per barrel, the latest product spreads stood at negative $39.4 per barrel for high sulphur furnace oil, $32.5 for HSD, $14.2 for motor spirit and $30.7 for jet fuel.

Sherman Securities cautioned that refineries relying heavily on imported crude could face losses in the December quarter if current margins continue. The subdued profitability could additionally complicate the implementation of refinery upgrade agreements.

Meanwhile, the brokerage further estimated that domestic refineries are absorbing $30 to $35 per barrel of the international HSD cost rise instead of passing the full impact on to consumers. It estimated that this is providing consumers with a benefit of regarding Rs. 30 billion to Rs. 32 billion a month. Stay Connected with ProPakistani.

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For now, refinery Profit Margins Fall Below 5 remains the part of the story worth watching, and further updates are likely as more details are confirmed.