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European demand recovery key to oil and GRM outlook

US snowstorms last week led to fall/closure of oil output, refining and petrochemical capacities. US oil output recovery is faster (90% restarted as of 23- Feb) while restart of refineries and petrochemical plants is likely to take longer. The shutdowns have boosted Singapore GRM to highest level since Mar’20 and further boosted already strong PE and PVC margins. Net auto fuel marketing margin in Q4FY21-TD is at its lowest in nine quarters, but is up from lows due to retail price hikes of 9-10%. More hikes are needed to prevent margin from plunging in Mar’21 and being over Rs2.5/l from Apr’21. Big inventory gains are likely in Q4FY21, which would help make up for weak GRM and marketing margins. We reiterate ADD on IOC, and BUY on GAIL, both gaining from petrochemical margin rise. GAIL also benefits from oil price strength.

* US refinery & petrochemical plant shutdowns boost GRMs & already buoyant polymer margins: Two US snowstorms shut refineries and petrochemical plants. 1.5m b/d of US refineries were still shut as of 24-Feb’21 and another 2.9m b/d, though restarted, may take weeks to fully ramp up. Shutdowns boosted diesel cracks, petrol cracks and Reuters’ Singapore GRM by US$0.6-3.3/bbl; they are at 7- 12 month highs. IOC’s core GRM based on spot prices during 19-25 Feb’21 is at US$0.37-1.63/bbl vs US$0.07/bbl in Q4FY21-TD. However, IOC’s GRM based on refinery transfer price is minus US$0.66/bbl in Q4-TD as, in a rising price environment RTP, which is based on preceding 15-30 day prices, is lower. However, rising prices would also mean inventory gain, which we estimate at US$4.26/bbl for IOC in Q4-TD. Large ethylene (72%), PE, PP and PVC capacity was still shut as of 24-Feb’21 and full restart may take weeks. Already strong PE and PVC margins have strengthened further due to the shutdowns. This augurs well for IOC and GAIL, whose petrochemical EBITDA was up 2.6-5.2x YoY and 61-90% QoQ in Q3FY21.

* Q4-TD marketing margin at 9-quarter low; large inventory gain in Q4: Auto fuel net marketing margin is at a 9-quarter low of Rs1.56/l in Q4FY21-TD as domestic prices did not keep pace with international prices especially in Jan’21. Net margin is up from low of Rs0.24/l on 16-17 Jan’21 to Rs2.96/l on 25-Feb’21 driven by hike in petrol and diesel retail prices by Rs7.35-7.56/l (9-10%). If no further price hikes are made, net margin would be Rs3.09/l in FY21E (up 39% YoY), but at Rs1.24-0.11/l on 1-Mar’21 and at latest prices. Retail price hikes of Rs2.9/l is required for net margin to rise to over Rs2.5/l at latest international prices. Surge in product prices would also mean product inventory gains, which we estimate at Rs40.6bn for IOC.

* Europe demand recovery key to oil price & GRM outlook: Petrol consumption in India has been up YoY and total and diesel consumption down modestly since Sep’20. It is down 2.4-8.6% YoY in 1-15 Feb’21 on a high base, but may be up over 20% YoY in Mar’21 on a low base. Second wave of Covid in Europe has meant petrol and diesel consumption in Spain, Italy and Portugal was down 31-33% YoY and 17-21% YoY in Jan’21 respectively. Indications are that demand fall was steep in UK and Germany too in Jan’21. Recovery in European demand may be crucial for sustained recovery in GRM and oil price outlook from current lofty levels.

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