India: Tough time ahead for refining & exploration cos

The refining margins of Indian refinery and exploration (R&M) majors in the coming quarters is expected to be lower than the first quarter of the current financial year. And if oil majors want to end the fiscal in the black, then oil bonds are necessary. These are but some issues highlighted in a recent Merrill Lynch report in the backdrop of a fall in international crude prices.

“We expect refining margins in later quarters to be lower than in first quarter. Benchmark refining margins to date in second quarter are already 19-20% QoQ lower”, says the report. “Two of the three R&M companies were in the black in first quarter without oil bonds. We believe all of them will need oil bonds to remain in the black in FY08E” the report goes on to add.
Interestingly, the fall in margin is not a domestic issue as the same has fallen in Singapore, too. The report says that the Indian refining margin in second quarter has been 19% QoQ lower while Singapore refining margin has been 20% QoQ lower. “The trend was similar in FY07 with second quarter Indian margin being 31% QoQ lower. In the last two years refining margins have been stronger in the first half of the US summer driving season during which global gasoline demand peaks”, says the report.

Meanwhile, even as global crude prices have been dipping in the recent past, the near future is not expected to be smooth as the hurricane season is around the corner.

Economic Times