The bell about Gross Refining Margins rise in May 2011

Karachi: Gross Refining Margins for the month of May‐11 averaged USD4.58/bbl, up 4% MoM, thus taking 4QFY11 average GRMs to USD4.95/bbl (up 31% QoQ).

According to Elixir Securities Limited, they have revised down Elixir Securities Limited April‐11 GRMs by USD1/bbl due to higher than expected Arab Light price during April‐11. FY11 average GRMs reached USD4.13/bbl (+83% YoY), highest since FY08. Due to one month lagged import parity pricing formula, the period from June‐10 to May‐11 shall determine the refining margins for FY11. With 23% YoY jump in oil prices during FY11, deemed duty contribution rose to USD2.72/bbl (up 28% YoY), highest since FY08.

Improvement in FO spread drove May‐11 GRMs:
HSFO spread improved by USD3.09/bbl, due to tight supply situation, and remained the main factor behind 4% MoM increase in GRMs. MS spread during the month turned positive (at USD1.43/bbl) primarily due to ongoing driving season in the west, whereas HSD witnessed 14% MoM decline to clock in at USD22.91/bbl.

The main contribution to 83% YoY rise in FY11 GRMs was widening in HSD spread to USD19.6/bbl, up 63% YoY. Naphtha and HSFO spreads, however, remained negative throughout the year, with FY11 average of USD ‐1.51/bbl and USD‐12.8/bbl. Averaged MS spread for FY11 remained dismal at USD‐0.45/bbl compared with positive spread of USD0.2/bbl in FY10. Decline in MS spread during FY11 was primarily due to pricing mechanism, which makes a RON adjustment to the Mogas 95 RON Arab Gulf prices based on a unitary method. Due to unitary adjustment, RON penalty (for 87 RON petrol produced by local refineries) rises with the increase in oil prices.

Strong GRMs for local listed refineries:
Amongst the listed refineries, NRL’s GRM for May‐11 declined marginally by 6% to USD6.4/bbl, due to higher share of HSD on its product slate. ATRL’s GRMs for May‐11 jumped by 11% MoM to USD4.38/bbl, driven by better MS spread due to higher share of MS on its product slate, whereas PRL’s GRM increased by USD0.53/bbl.

With HSD heavy product slate, NRL witnessed the highest GRM of USD5.83/bbl (†81% YoY) during FY11, whereas GRMs for ATRL & PRL averaged USD3.9/bbl (↑88% YoY) and USD1.07/bbl (↑245% YoY), respectively.

GoP deregulates MS, HOBC, LDO and JP1/4 prices:
As per OGRA notification, ex‐refinery/ex‐depot prices of MS, HOBC, LDO and jet fuels have been deregulated, effective June 1, 2011, and will now be notified by refineries and OMCs. However, it envisages only a partial implementation of the original deregulation plan as OGRA has notified product wise IFEM rates for Jun‐11. It is pertinent to note here that the price deregulation plan is not a pure price deregulation as:

1. The deregulation plan envisages deregulation of the freight component of the fuel prices, allowing for product prices to vary from region to region within the country, where prices in the upcountry would be higher than prices in the coastal areas.

2. OGRA would continue to notify freight costs for various locations. Since OGRA has notified one IFEM rate for each product for all 12 depots, as opposed to different freight rates for different regions, even the freight pool deregulation has not been fully implemented.

3. End product prices would continue to remain capped at levels determined through the old pricing formula i.e “import parity price + PL + inland freight (IFEM) + OMC margin + dealer margin + sales tax”.

The move shall thus have no major earnings impact on OMCs and refineries as the deregulation doesn’t allow OMCs and refineries to increase their overall margin pool, while providing an option for downside in margins through selling products below capping levels. However, price deregulation could eventually lead to higher ex refinery prices for MS, which is currently being priced lower than import parity due to unitary RON penalty and may raise refinery margins on MS.

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