Sector Update | 22 November 2019
Oil & Gas
Oil & Gas
Glut in refining suppresses GRMs
Singapore (SG) GRM shot up during 2QFY20 due to rise in petrol and FO cracks
averaging USD6.3/bbl for the quarter. Continued demand
weakness combined with normalization of FO supply resulted in SG GRM
declining to USD4.1/bbl and USD1.7/bbl in Oct’19 and Nov’19 YTD, respectively,
from USD7.6/bbl in Sep’19.
We estimate that a total of 2.6mnbopd of refining capacity came online in 2019
against incremental demand of 0.8mnbopd (revised down from 1.1mnbopd at
the start of the year).
In absence of global recovery,
we anticipate that GRMs would remain
suppressed for few more months
in lieu of incremental refining capacity
Refiners add to the glut
Our earlier BPCL update
At the beginning of 2019, IEA forecasted incremental demand of 1.4mnbopd of
oil consumption; it was revised down to 1.0mnbopd in their latest report.
At the start of 2019, IEA anticipated incremental capacity addition of
2.6mnbopd while our research shows that the said capacity has already come
up. Even though it is less than IEA’s forecast, it is much ahead of the incremental
To make matters worse, Chinese teapot refineries have ramped up their
utilization rate to ~67% vis-à-vis 61% in Oct-Nov’18 as the country increased
crude oil import quotas for the former in 2019.
The higher capacity addition in 2019 is also a response to the higher diesel
demand post implementation of IMO 2020.
IMO 2020 boost to GRM – a mirage!
With incremental demand of 2.0mnbopd of diesel as a result of IMO 2020, it
was anticipated that diesel cracks would jump sharply. Most also believed that
GRMs would spurt.
On the contrary, our belief was that although diesel cracks might improve, there
would be no commensurate demand for the higher production of other refinery
products. As a result, GRMs may not improve. However, refiners would still
benefit through higher utilization of their assets.
Despite IMO just 50 days away, diesel cracks have failed miserably to revive in
line with the street expectation of USD25-30/bbl (link) (~USD11/bbl for Nov’19
YTD v/s USD14/bbl in 2QFY19). More importantly, the forward curve for diesel
depicts an incapacitated scenario of a mere USD14-16/bbl.
We believe that as low GRMs persist, higher cost refiners would close their
operations and SG GRM would revert to the long-term average of USD5-6/bbl.
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com); +91 22 6129 1566
22 November 2019
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