The Arab light crude oil prices trend in current month is estimated to reduce domestic gross refinery margins (GRMs) by 7 percent in January to $1.6 per barrel against $1.7 per barrel last month, analysts said.
"Though Arab light crude oil prices remained firm in January 2012 versus December 2011, middle distillate prices (with the exception of naphtha) declined in the range of 4-5 percent, rendering decline in the middle distillate crack spreads", Nauman Khan, an analyst at Topline Securities, said. The said price trend is estimated to reduce domestic gross refinery margins (GRMs) by 7 percent in January to $1.6 per barrel, he added.
Product-wise, negative spread on naphtha is expected to reduced to (-ve) $5.5 per barrel against $7 per barrel last month, while spread on HSFO could be widened to (-ve) $11 against $8 per barrel of last month, he said. In the superior product category, HSD and kerosene spreads are estimated to decline to $10 per barrel previously from $16 per barrel, while MS spreads are expected to dip into negative as against positive $1 per barrel last month, he added.
He said that company-wise GRMs suggest that ATRL on account of higher weightage of superior products (MS and HSD) in its product mix continue to lead the pack with company's estimated GRMs standing to the tune of $2.3 per barrel, down 9 percent from $2.6 per barrel last month.
Among the other listed companies, NRL's GRM is likely to decline by 5 percent to $0.6 per barrel while PRL and Byco GRMs are estimated to stand around $0.9 and $1.0 per barrel, down 17 percent and 11 percent respectively. "With firm oil prices and their implications on domestic political and economic scenario, we believe the inherent regulatory risk associated with the reduction in deemed duty on HSD comes into limelight", he said.
Under the prevalent scheme, 7.5 percent customs duty is charged on the imports of HSD, which in turn is providing a profitability cushion from domestic refineries. In recent price revision, deemed duty is currently hovering around $9.5 per barrel in absolute terms while current levels of international HSD prices could push the same above $10 per barrel in the upcoming February price revision. "This in turn could bring to live the deemed duty saga which we witnessed in the early part of the year", he said.
Being the jugular vein of refinery sector profitability, the reduction in the deemed duty from current levels could adversely affect refinery sector's profitability. "As per our estimates, 2.5 percent decline in the deemed duty would reduce ATRL and NRL (companies under our coverage) annualise earning by Rs 6 and Rs 11 per share, respectively", Nauman said.