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Covid rise in Europe hits oil/GRM; marketing margin to rise

Lockdowns in Europe due to surge in Covid has hit oil demand. Demand was down 14-24% YoY in six European economies (Europe-6) in Dec’20-Jan’21 and 21% YoY in three economies (Europe-3) in Feb’21; fall is steeper in petrol than in diesel. European demand worries together with rise in US oil inventories by 41mn bbl in past five weeks, as snowstorms hit refinery utilisation, has led to US$7.6/bbl fall in Brent and US$0.6-3.3/bbl fall in petrol and diesel cracks from recent peaks. However, falling prices may boost net marketing margin from minus Rs0.22/l now to Rs1.2-1.7/l on 1-16 Apr’21. Oil price fall is negative for Oil India and GAIL, but Brent is still above our FY22E estimate of US$60/bbl. Impact is mixed for BPCL and IOC as GRMs would be hit, but marketing margins are likely to rise.

* Lockdowns in Europe on rising cases; vaccine rollout slow: The 7-day rolling average of Covid cases in EU at 137,433 is up by over 50% from low in Feb’21 while that in US at 54,308 is ~78% down from peak in Jan’21. While 39.7% (14% both doses) of US and 46.7% (3.8% both doses) of UK population has been vaccinated, only 13.5-14.2% (3.8-4.9% both doses) of population in five EU economies is vaccinated as of 24-Mar’21. Surge in Covid has meant lockdown or curfews in most European economies. Covid trend is rising in most of Europe except in UK, Portugal and Czech republic (table). Lockdowns have been recently reimposed in many countries with rising cases and slow vaccine rollout including in France and Germany. This may mean European oil demand remains weak even in Q2CY21.

* Lockdowns hit European demand leading to fall in oil price and GRM: Petroleum products demand in Europe-6 was down 14-24% YoY in Dec’20-Jan’21, and that in Europe-3 was down 21% YoY in Feb’21. Petrol demand fall was steeper at 22-36% YoY in Dec’20-Jan’21 and 23% YoY in Feb’21, but diesel demand fall was more modest at 8-19% YoY in Dec’20-Jan’21 and 14% YoY in Feb’21. Germany, which accounts for 23-35% of Europe-6 petrol and diesel demand, saw in Jan’21 the steepest fall (44%-33% YoY) since the pandemic began. Petrol demand decline in US is much more modest than in Europe at 13-8% YoY and diesel demand is down 2% YoY to up 2% YoY in Dec’20-Mar’21-TD. Weak demand in Europe has led to fall in Brent by 11% (US$7.6/bbl) from the peak on 5-Mar’21. Europe accounted for just 7% of global petrol, but for 23% of global diesel demand in CY19. This probably meant that rise in diesel cracks (US$1.3/bbl) was more modest than in petrol (US$5/bbl) when US snowstorms hit US refinery utilisation, and fall is steeper (US$3.3/bbl) than in petrol (US$0.6/bbl) when US refinery utilisation recovered and European demand weakened.

* International price fall to boost net marketing margin unless fall is fully passed on: Auto fuel net marketing margin is at a 9-quarter low of Rs1.33/l in Q4FY21-TD as domestic prices were not hiked adequately in Jan-Mar’21. Cut in domestic auto fuel prices by Rs0.37-0.39/l in the last two days has meant net margin is down from Rs0.09/l on 23-Mar’21 to minus Rs0.22/l on 25-Mar’21. If international and domestic prices remain at current levels, we estimate net margin at Rs1.23/l on 1-Apr’21 and Rs1.68/l on 16-Apr’21 (based on international price on 25-Mar’21). We are optimistic of net margin at Rs2.5/l in FY22E given the government’s track record.

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