Refining: A case for higher spreads! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Refining: A case for higher spreads!

Jan 10, 2007

While rising petroleum product prices have indeed been a cause of worry in recent times, the fact that this is not entirely crude price driven, makes us believe that they are likely to remain stronger on account of certain structural changes in the refining industry. Put otherwise, we believe that the spread between crude oil and product prices is likely to remain stronger than what it was historically. Here are a few reasons as to why we believe this would happen:

  • Clean fuels Specifications: On the back of environmental concerns, the fuel specifications are expected to change significantly over the next 5 to 10 years. The gasoline sulphur specification, which was 750 (ppm) in Latin America, is expected to decline to 300 (ppm) in 2010 and further to 100-200(ppm) by 2015 (source Reliance Industries). In Asia pacific, the same is expected to fall from 400 (ppm) to 100 (ppm). Tighter product specifications increase desulphurization requirements, which inturn leads to higher capital cost. Higher capital cost increases the desired minimum return for the investment. Also, the increased regulatory adherence restricted the investment in the distillation capacity, which failed to keep pace with rising consumption.

  • Increased global heavy, sour crude slate: As per estimates, almost 30% of the world crude reserves are light sweet, compared to 63% of light/medium sour crude. This is likely to increase the price spread between the sweet-light crude and heavy sour crude. Increased heavy crude slate will keep processing costs higher, which in turn is expected to keep the refining margins higher.

  • Vintage refining capacity in the world: Age-wise profile of the refining capacity reveals the fact that more than 70% of the world’s refining capacity is aging (more than 25 years old), thus, meeting the tighter product specification is getting increasingly difficult for these refiners. Also, as these vintage refiners are capable of refining only sweet and light crude, the spread differential is likely to increase between sweet/light crude and heavy and sour crude. The same is vindicated from the fact that difference between Arab light and heavy crude, which averaged US$ 1.6 barrels (during January 2000 to December 2005), increased to US$ 5.2 barrel in 2006.

    Composition of world refining capacity...
    Feedstock Number of refineries % of Total
    Extra heavy crude 31 4.7%
    Heavy crude 114 17.2%
    Medium crude 260 39.3%
    Light crude 135 20.4%
    Extra light crude 121 18.3%
    Total 661  

Apart from these facts, the increased demand from the Asian countries (especially for the light and middle distillates), rising green field projects costs (due to increase in the prices of steel and other commodities) are also likely to keep the refining margins on the higher end. There has been a sea change in the refining industry over the last few years driven by regulations, crude oil availability and demand dynamics. With no significant capacity coming up in the next 2-3 years, the margins are likely to be strong.


Equitymaster requests your view! Post a comment on "Refining: A case for higher spreads!". Click here!

  

More Views on News

GULF OIL LUBRICANTS Surges by 6%; BSE OIL & GAS Index Up 0.6% (Market Updates)

Jun 4, 2020 | Updated on Jun 4, 2020

GULF OIL LUBRICANTS share price has surged by 6% and its current market price is Rs 642. The BSE OIL & GAS is up by 0.6%. The top gainers in the BSE OIL & GAS Index is GULF OIL LUBRICANTS (up 5.8%). The top losers are PETRONET LNG (down 0.4%) and HPCL (down 0.5%).

INDRAPRASTHA GAS Surges by 5%; BSE OIL & GAS Index Up 1.2% (Market Updates)

Jun 4, 2020 | Updated on Jun 4, 2020

INDRAPRASTHA GAS share price has surged by 5% and its current market price is Rs 516. The BSE OIL & GAS is up by 1.2%. The top gainers in the BSE OIL & GAS Index is INDRAPRASTHA GAS (up 5.4%). The top losers are OIL INDIA (down 0.7%) and IOC (down 1.0%).

More Views on News

Most Popular

6 Charts Showing the State of Indian Financial Markets in 2020 (Sector Info)

May 26, 2020

Six charts showing how Indian financial markets have performed in 2020 so far...

Why We Picked This Smallcap Stock for a Post Coronavirus World (Profit Hunter)

May 28, 2020

Covid-19 has made it a survival of the fittest race for many companies. The ones that can adapt will thrive in a post crisis world.

What the RBI's Rate Cut Means for Options Traders (Fast Profits Daily)

May 25, 2020

The RBI governor has cut the repo rate to 4%. What does this mean for options traders? Find out in this video.

Who Will Be Crowned the 'Multibagger Blue Chip' of the Decade? (Profit Hunter)

May 25, 2020

Will the mutlibagger blue chips of the past decade continue to rule the bourses?

More

India's #1 Trader
Reveals His Secrets

The Secret to Increasing Your Trading Profits Today
Get this Special Report, The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE OIL & GAS


Jun 4, 2020 (Close)

S&P BSE OIL & GAS 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS