Singapore Refining Margin Benchmark Falls To Its Lowest In 40 Quarters

The Singapore gross refining margin, a benchmark of profitability for crude refiners, dropped to its lowest in 40 quarters as the global economy slows and demand for high-sulfur oil fell with the shipping industry switching to cleaner fuel.

The Asian benchmark—a measure of how much a refiner makes by turning a barrel of crude into finished products—has averaged around $2.6 a barrel in the ongoing October-December quarter, down 60 percent over the previous three months, according to data compiled by BloombergQuint. That’s the lowest since the third quarter of 2009-10.

One of the reasons is the cost of importing and exporting oil rose because of the U.S. sanctions on two state-owned Chinese crude shipping companies—Cosco Shipping Tanker (Dalian) Co and Cosco Shipping Tanker (Dalian) Seaman & Ship Management Co. This tightened supply in the tanker market, leading to a surge in freight rates and narrowing margins.

But the benchmark turned negative in the last two weeks, probably for the first time ever, due to a sharp decline in margins on fuel oil used by ships. That came as a surprise as most analysts and companies had forecast an increase in GRMs due to the stricter standards mandating use low-sulfur oil.

The International Maritime Organization’s new standards rolling out from January require shipping vessels to use fuel oil—a residue of petrol, diesel and jet fuel—with a sulfur content of less than 0.5 percent compared with the existing 3.5 percent. This shift was expected to boost gross refining margins as the demand for cleaner fuels was expected to rise.

But the GRMs dropped as the demand for fuel oil—the second most consumed fuel with 23 percent contribution—fell. And demand for low-sulfur fuel didn’t compensate that decline, narrowing the margins.

Moreover, refining margins on diesel and petrol also didn’t rise in a slowing global economy grappling with a supply glut. This double-whammy led to a 60 percent plunge in the Singapore GRMs. Indian refiners, however, are likely to be insulated.

“A sharp fall in high sulfur fuel oil cracks due to impending shift in the shipping industry bunker norms, coupled with softness in demand for diesel due to weaker economic activity and relatively higher supply from refineries have impacted the GRMs,” said Nitin Tiwari, who tracks oil & gas at Antique Stock Broking. “The impact on domestic refiners would likely be limited due to lower exposure towards fuel oil.”

Kotak Securities said its calculation of India refining margins benchmarked to domestic refined products mix shows moderate improvement so far in the ongoing third quarter of financial year ending March 2020 as contrary to a decline in Singapore complex margins. The brokerage, however, has not adjusted the India gross refining margins for logistic costs, but it admits that domestic refiners will be partly impacted from a spike in freight rates for a few weeks.

This rise in India gross refining margins will benefit Reliance Industries Ltd. the most as it does not produce fuel oil, margins of which have declined sharply, it said. Among the state-owned refiners, Hindustan Petroleum Corporation Ltd. will be negatively impacted due to its high fuel oil production at 10 percent, significantly above 4-5 percent of Bharat Petroleum Corporation Ltd. and Indian Oil Corporation Ltd. But over the medium term, Kotak Securities expects margins of Indian refiners to remain subdued due to accelerated refining capacity addition and slower demand growth.