How will the crude price rise impact oil refining companies?

NEW DELHI: As crude oil prices rise and Russia implements its production cut, the global oil market is likely to experience tighter supplies and higher prices. Analysts predict a greater impact on Indian oil refining companies in addition to the global market. Despite Russia's announcement of a five-lakh-barrel-per-day cut, Singapore's Gross Refining Margins (GRM) have begun to fall.

As one of the world's main oil importers, India's refineries will continue to be of interest for three reasons. The first is that crude has once more started to increase in price. The second reason is that Russia will reduce its crude output. The declining Singapore Gross Refining Margins is another element that will have an impact on the profitability of Indian refineries.

Since hitting a recent low of $79 per barrel on February 6, crude prices have risen to about $86 per barrel. Furthermore, as crude prices rise, the marketing margin earned by oil marketing companies on each liter of gasoline and diesel will see a decrease. Consequently, the marketing departments of these oil refineries and oil marketing firms may be impacted.

As a result of the Western countries' ban on Russian oil, Russia has stated that it will reduce production by approximately 5 lakh barrels per day, or nearly 5% of total output. It should be noted that in January, Russia met nearly 30% of India's crude demand. This amounted to only 22% of the crude imported by India from Russia in November.

Therefore, Russia's share has been steadily rising, and if Russia reduces its production, this could also result in a reduction in the ability of Indian refiners to source crude from Russia. Now as a result of this, the gross refining margin of Indian refiners may be adversely affected. Rising imports from Russia were advantageous for these oil refiners because they were able to purchase crude at a lower price. As one of the largest oil-importing nations in the world, India's refineries play a significant role in the country's energy security and economy.

Analysts also claim that 10% of Russian crude used to increase Indian refiners' gross refining margins by about $1.6 per barrel. The production cut by Russia is significant because it is one of the largest oil-producing nations in the world, and its actions can have a significant impact on global oil markets. The decline in GRMs may lead to a drop in profitability for Indian refineries, which could have a ripple effect on the overall economy.

Furthermore, the Singapore gross refining margin, which is the Asian benchmark of GRM, has been on a declining trend, falling from its recent peak of around $14 per barrel on January 25th to just $6 per barrel now, representing a 58% drop. Now this decline in GRM is largely in the back of declining product spreads and also because of the sudden rise that we have seen in crude oil prices. Therefore, the earnings of oil refineries are also impacted by the drop in GRMs.

Source: ET Now
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