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Oil prices, inventory gains to drive earnings…

Crude oil prices uptrend continues…

Global crude oil prices continued to move upwards in Q1FY22 and surpassed pre-Covid level. Brent crude oil prices on a closing basis jumped US$14.7/bbl QoQ to US$75.1/bbl as Opec+ production remained below pre-Covid level leading to a deficit of oil supply. Subsequently, average crude oil prices increased by US$7.9/bbl to US$68.6/bbl. Hence, net realisations of upstream companies are expected to increase QoQ as well as YoY.

GRMs recover slightly; inventory gains to support again

Benchmark Singapore GRMs are gradually recovering and were at US$2.1/bbl in Q1FY22. Singapore GRMs are less relevant now as low grade fuel oil is a significant component of benchmark. For Indian refiners, cracks of gas oil, gasoline, jet fuel are more important. Cracks of all three products saw a recovery QoQ during the quarter. Cracks for gas oil increased by US$0.6/bbl from US$4.7/bbl to US$5.3/bbl while gasoline product cracks saw a higher jump as it increased by US$2.7/bbl to US$9.8/bbl. Jet fuel spreads saw a recovery of US$1.2/bbl to US$4.5/bbl. Overall, core GRMs for refiners, although on recovery mode, will remain subdued during Q1FY22. GRMs will be supported by inventory gains during the quarter. Fuel demand saw YoY increase as demand was impacted due to nationwide lockdown in Q1FY21. However, demand dipped QoQ owing to second wave of Covid-19. We expect marketing volumes to increase in the range of 24-33% YoY. On a QoQ basis, marketing volumes are expected to fall in range of 8-10%. We expect some improvement in marketing margins QoQ as increased oil costs were passed on to customers. This will lead to steady marketing profitability QoQ for OMCs in the quarter. Overall profitability for OMCs will decline QoQ as all companies reported strong profits (led by inventory gains) in Q4FY21.

CGD volumes to sharply grow YoY, albeit on lower base

Sales volume of city gas distribution (CGD) companies are expected to increase in the range of 108-144% YoY as demand was affected by nationwide lockdown in base quarter. However, sequentially, demand is expected to be down 17-20% due to travel restrictions amid second wave of Covid-19. CGD companies’ realisation are expected to increase YoY due to price hikes. Subsequently, gross margins are expected to be higher YoY for CNG heavy companies. For PNG-heavy companies, gross margins are expected to decline YoY due to higher gas prices. On QoQ basis, margins are expected to remain flat/ higher. For large gas utility companies, volumes are expected to be higher YoY given reduced LNG imports in the base quarter. However, volume is estimated to fall QoQ due to lower demand.

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