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Profitability of refineries to remain elevated

Profitability of refineries to remain elevated
Profitability of refineries to remain elevated
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June 15, 2022 (MLN): The bottom line of refineries will keep on expanding in near terms as they reap dual impacts of high refinery yields and increased oil prices resulting in inventory gains.

The only pressure can arise from worsening furnace oil yields in the wake of increased FO demand from the power generation front, a report by AKD Securities noted.

From the global market perspective, relatively low refinery production which is around 2mn bbl/d compared to pre-COVID and increasing seasonal demand for gasoline moving into the summer have sent the refinery margins on the uptrend, after seeing a slight dip in end-May.

Even after sharply increasing fuel prices in the previous two petrol price revisions, the authorities have a predicament on their hands once again, in the way of rising crude and refined product prices globally.

Since the last price revision, average Arab Light prices stood at around $123/bbl, up by 5% compared to May 2022, while global prices of Gasoline and Diesel increased by around $6 or11% during the same period, signifying the tight global petroleum markets.

According to estimates, these developments result in average ex-refinery prices for the fortnight standing at Rs215 for MoGas and Rs243 for HSD per litre. Assuming unchanged retail prices, PDC works out to be Rs18 for MoGas and Rs45 for HSD for the fortnight.

The report further suggests that the government has already subsidized around Rs216bn worth of fuel, as a payable on its books between March and May 2022. With the PDC allowance budgeted at Rs250bn for FY22, the country’s oil managers may need to undertake tough decisions very soon to make sure the earmarked amount is not overrun in the last month, as the local sector already suffers from a burgeoning liquidity problem.

The recent budget unveiled another worry for the authorities and consumers alike, the PDL target. The collection target for the next fiscal year is set out to be R750bn, up 23%YoY from last year’s initial estimate, the report further added.

Achieving the desired volumetric targets to ensure collection may be another thing, as there may be slowdowns on the back of higher base effect, expected demand pullbacks due to risen fuel prices and lower forecasted GDP growth, and crushing budgetary stance for car assemblers/sellers in recent Fed Budget 2023.

More reasonably, the target may become achievable if global oil and refining margins come down soon, giving the authorities more space to work with without hurting end consumers, it noted.

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Posted on: 2022-06-15T14:27:31+05:00

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