Key Takeaways
- Gross refining margins (GRMs) fell to $11 per barrel in September from $33 per barrel in August.
- Higher crude costs, driven by security concerns, have squeezed margins on high-speed diesel (HSD).
- Petrol margins have also weakened, with the motor spirit crack spread dropping to $14 per barrel.
Pakistan’s oil refining sector is experiencing a significant decline in profitability, with gross refining margins (GRMs) dropping to approximately $11 per barrel in September, compared to $33 per barrel in August. This marked a substantial decrease from the five-year average of $13.5 per barrel.
According to a Sherman Securities research report, the decline in margins is primarily attributed to a $12 to $15 per barrel increase in crude premiums for September and October deliveries, linked to security concerns related to the US-Iran conflict. These increased costs have significantly reduced the effective margin on high-speed diesel (HSD).
Under the current pricing formula, refineries are allowed a spread of $41.89 per barrel over Dubai crude, which includes a negative $1.5 per barrel crude premium and $8 per barrel freight. However, the actual crude premiums for September deliveries have risen to about $12 to $15 per barrel, leading to a higher landed cost. Assuming Arab Light crude at $95 per barrel, the landed cost rises to about $115 per barrel after adding the premium and freight. With HSD selling at about $148 per barrel, the effective diesel spread is around $33 per barrel, well below the $41.89 per barrel spread provided under the pricing formula.
Additionally, furnace oil is creating another significant challenge for refinery margins. While crude costs have increased sharply, high-sulphur furnace oil prices have remained around $76 per barrel, widening the negative furnace oil spread to about $39 per barrel in September from $15 per barrel in August.
Crude costs, including premiums, have increased by about 27 percent since the end of August for Pakistan’s import-based refineries. Petrol margins have also weakened, with the motor spirit crack spread falling to about $14 per barrel from an August average of $27 per barrel.
The latest product spreads stand 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, with the underlying crude price estimated at about $116 per barrel.
Sherman Securities warns that refineries relying heavily on imported crude could face losses in the December quarter if current margins continue. The weak profitability could also complicate the implementation of refinery upgrade agreements.
The brokerage further estimates that domestic refineries are absorbing $30 to $35 per barrel of the international HSD price increase instead of passing the full impact on to consumers. This is providing consumers with a benefit of about Rs. 30 billion to Rs. 32 billion a month.
