Betting on oil

Refining hit a 12-month high led by surging global fuel prices that hurt retail and petrochem margins.

ICICI Securities expects a rebound in petrochem margins. “Refining hit a 12-month high led by surging global fuel prices that hurt retail and petrochem margins. Further, retail margins were hit by the domestic retail price cut; however, this is unlikely to impact earnings of oil marketing companies (OMCs) due to relief through excise duty cut and assurance of further recompense via oil bonds. We reiterate GAIL and Gujarat Gas as our top picks followed by BPCL and HPCL.

Petrochem margins declined after seven months as polyester and polymer margins crashed 31.5% and 7.9% YoY respectively. This was due to 13.1% YoY increase in naphtha prices. Integrated polyester margins, excluding paraxylene prices, declined 38.8% YoY

We expect supplies to weaken over April-June. But revival in consumption and restocking is likely to facilitate a rebound in petrochem margins.

Retail: The Government reduced motor spirits (MS) and high-speed diesel (HSD) prices by Rs 2 a litre (4%) and Re 1 a litre (2.8%) respectively in February. This was untimely. Crude continued upward and is now at $60 a barrel versus $51.3 a barrel in mid- January.

MS prices spurted 21% in the past month compared with 3% increase in crude prices; MS margins turned negative. HSD prices went up marginally (1%). This has led to a sharp 41% MoM decline in HSD margins and 98% MoM decline in blended margins. The excise duty cut from 8% to 6% has an incremental positive impact of Rs 425 per kilolitre.

Blended retail margins improved in March 2007 versus March 2006. HSD margins, rose to Re 0.5 per litre compared with Rs 4 per litre losses in March 2006.

Expect 2006-7 gross under-recoveries to be 26.2% higher than 2005-6. But it would not impact OMC earnings as this is covered by subsidy sharing and oil bonds.

Refining: GRMs remained robust in March 2007 hitting a 12-month high of $6.6 per barrel, an impressive 16% MoM improvement. However, refining margins were 19.2% lower than in March 2006. Crude price increased 4% MoM.

Refining margins in February 2007 improved 18.3% MoM and 29.5% YoY to $5.7 per barrel compared to January 2007 and February 2006 respectively. Q4, 2006-7 margin is robust at $5.7 per barrel.