Falling product prices offset rising crude price

Pratim Ranjan Bose

Kolkata, Aug 4

The rise in crude prices well beyond the $70 mark notwithstanding, PSU oil marketing companies IOC, BPCL and HPCL are not expecting a major increase in under-recoveries during the second quarter.

The trick lies in falling product prices and reducing spread. Profitability, however, may be impacted as the refining margin is lower compared to the first quarter.

Incidentally, the current trend of falling margin in the face of rising crude prices is in contrast to last year where margins rose with the rise in crude prices.

"We are not expecting any major increase in under-recoveries over and above the compensation package (announced in June this year) during July and August due to a fall in spread (between crude and product prices)," a BPCL official said.

"However, we can take a comprehensive view on the issue only at the end of the second quarter when the impact of smaller cost components like freight rates would be clear," the official said.

The fall in spread, however, may have its due effect on the profitability of the three PSUs.

Singapore crack margin

According to sources, the Singapore crack margin, which was as high as $10.04 and $8.2 per barrel respectively during May and June, has dropped to a mere $6.1 in July and $5.8 in August. The fall in margin was attributed to stagnating product prices vis-à-vis rising crude prices.

Refining margin registered by Indian refiners is correlated to the Singapore crack margin. Accordingly, all the three major refiners have registered GRM during the first quarter of this fiscal.

IOC, the largest refiner, led the pack with a GRM as high as $9 per barrel with maximum use of cheaper crude and with access to the most cost-effective product transportation system (pipeline network) across the country.

Product prices (especially gas oil and aviation fuel) were stagnating since July as (Asian) refineries returned to production from the maintenance shutdown in May-June. Reduction in demand for aviation fuel from China is also considered a major reason behind the price stagnation.

Related Stories:
Petroleum products pricing Oil marketing firms' balance sheets may be under strain in Q3 too
Under-recoveries strike oil PSUs again in Q2 IOC net dips 23 pc to Rs 950 cr

(This article was published in the Business Line print edition dated August 5, 2006)
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