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GRM & marketing margins weak but hopeful of recovery

Reuters’ Singapore GRM in May’21-TD is down 10% MoM from 14-month high of US$2.7/bbl in Apr’21, hit by MoM fall in petrol, LPG and fuel oil cracks. GRM on 18- May’21 is sharply lower at just US$1.16/bbl. We estimate Q1FY22-TD GRMs of BPCL, IOC and RIL to be weak at US$0.4-3.5/bbl. Recovery in diesel cracks, which were pre-covid at US$11.0-14.3/bbl in Q4-Q3FY20, is key to GRM rising to our FY22E estimate of US$3.4-7.0/bbl.

Auto fuel net marketing margins are also weak at Rs0.42/l in Q1FY22-TD and Rs0.66/l on 18-May’21. For OMCs, marketing margin recovery to Rs2.0-2.5/l is also key to stock performance; price hikes of Rs2.2-3.2/l are required, which we are optimistic about. Lockdowns have meant auto fuel sales volumes are up YoY on a low base but down 3-9% on Apr’19 and 27-29% on 1-15 May’19 base.

* Singapore GRM down from 14-month high in Apr:

Reuters’ Singapore GRM, which was at 14-month high of US$2.7/bbl in Apr’21, is down 10% MoM to US$2.4/bbl in May’21-TD hit by MoM fall in petrol, LPG and fuel oil cracks; GRM is sharply lower at just US$1.16/bbl on 18-May’21. Petrol cracks at 17-month high of US$11.1/bbl in Apr’21 were main driver of GRM recovery but are down to US$10/bbl MoM in May’21- TD and at US$8.7/bbl on 18-May’21. Petrol cracks’ strength was driven by US snowstorms in mid-Feb’21 that cut US refinery utilisation rates and led to steep fall in US inventories to 6.8m bbls below five-year average level. Recent correction appears to be due to rise in US inventories in the last six consecutive weeks by 5.6m bbls and steep fall in petrol consumption in India in 1-15 May’21 due to second covid wave.

* Diesel cracks recovery key to GRM recovery:

Diesel cracks at US$5.7/bbl in May’21-TD are up MoM and higher at US$6.1/bbl on 18-May’21 but still well below pre-covid level of US$11.0-14.3/bbl in Q4-Q3FY20. Diesel cracks have been hit by surge in covid in parts of Europe, e.g. Germany, and rise in refinery yields as jet fuel output is capped. Recent diesel cracks recovery appears to be due to decline in US distillate inventory in the last five consecutive weeks by 11.1m bbls to 5.8% below fiveyear average levels. We estimate Q1FY22-TD GRMs of BPCL, IOC and RIL at US$0.4-3.5/bbl, lower than our FY22E estimate of US$3.4-7.0/bbl. Recovery in diesel cracks would be key to FY22E GRM rising to our estimates. Recovery in global diesel demand as vaccines are rolled out and refinery closures are likely to drive recovery in diesel cracks. IEA estimates global diesel demand to be at pre-covid level in CY22E and global refinery utilisation at 77.8-79.2% in CY21-CY22E vs 72.5% in CY20.

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