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Gas price surge boosts GRMs, but Indian GRMs likely to lag

Reuters’ Singapore GRM is up 2.2x from US$3.2/bbl in Aug’21 to US$6.9/bbl in Oct’21-TD driven mainly by rise in diesel, jet fuel and fuel oil cracks. Transportation fuel cracks are at 21-23 month highs. Cracks rise is driven by: 1) switch to liquid fuels from gas due to much higher gas prices; 2) fall in refinery utilisation in China; and 3) US refinery closures due to hurricane Ida. However, we estimate GRM of Reliance Industries (RIL) to be lower than Singapore GRM in Oct’21-TD mainly due to petcoke (produced instead of fuel oil) cracks being sharply lower than fuel oil cracks. OMCs’ GRM may be in the red hit by 15-30 day lag of its refinery transfer price to international prices and surge in fuel and losses. GRM strength may continue in FY23 if gas/LNG prices remain higher than liquid fuels including diesel.

* Singapore GRM up 2.2x since Aug to US$6.9bbl in Oct’21-TD: Singapore GRM is up from US$3.2/bbl in Aug’21 to US$6.9/bbl in Oct’21-TD driven by rise in most cracks by US$0.4-6.7/bbl with rise being steepest in case of diesel and most modest for naphtha and petrol. Naphtha, fuel oil and diesel cracks jump appears driven by consumers switching from gas to these liquid fuels as gas prices surged to levels higher than these liquid fuels. Aramco estimated in early-Oct’21 that switch from gas to liquid fuels had boosted oil demand by 0.5m b/d. High coal and gas prices have led to use of liquid fuels to generate power. Demand recovery on fall in covid cases in Asia-Pacific, fall in Chinese teapot refinery utilisation and US refineries’ shutdown after hurricane Ida in Sep’21 (most capacity has now restarted) also boosted GRM.

* Light at the end of the tunnel for GRMs? Significant GRM recovery was not expected for years as: 1) 3.6m b/d of global refinery closures are announced vs 6m b/d needed to boost utilisation to over 80%, and 2) diesel cracks were way below pre-covid levels; diesel cracks are now at 21-month high. GRM strength may sustain if gas prices are higher than diesel (FY23E futures lower). Risks to GRM are China and US refinery utilisation rebound, new capacity and covid waves capping demand.

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