GRM starts Q4 on a weak note as diesel cracks plunge
Key recent developments / data-points in the oil & gas sector are:
* Singapore GRM is at US$4.3/bbl in Q3FY19 and at US$3/bbl in Q4FY19-TD; RIL’s Q4-TD GRM is estimated at US$5.9-6.6/bbl and OMCs’ at US$4.5-4.9/bbl.
* US oil output and crude inventory was flat WoW in W.E. 28-Dec’18 and US oil rig count was down by eight last week.
* Net auto fuel marketing margin is at Rs1.3/l in Q3FY19, at super-normal level of Rs5.48/l on 7-Jan’19, at Rs5.61/l in Q4FY19-TD and at Rs1.04/l in FY19-TD.
* Jan’19 LPG and kerosene subsidy are down 37%-68% MoM.
* Singapore GRM starts Q4FY19 weaker than in Q3 as diesel cracks also decline:
Singapore GRM at US$4.3/bbl in Q3FY19 was at a 33-quarter low. Singapore GRM in Dec’18 was at US$2.9/bbl and in Q4FY19-TD is at US$3/bbl. Diesel and petrol cracks in Q4-TD at US$10.5/bbl and US$3.9/bbl are down 30% and 19% QoQ. Diesel cracks were at a 19-month low of US$11.7/bbl in Dec’18 and are at a 29- month low in Jan’19-TD; this does not augur well for Indian refiners as diesel is over 40% of their product slates. Diesel cracks appear to have been hit by fall in Indian demand in Nov’18 and US demand in the last two weeks.
* Oil recovers but still below levels needed for US output to rise as expected; rig count down since WTI fell below US$55/bbl:
Oil corrected due to concern of oversupply in CY19 with US expected to be the main driver of global supply growth. However, despite recent recovery, WTI remains below the level of US$55/bbl which is needed for US oil output to rise as much as expected. WTI below US$55/bbl thus appears pricing in weaker global demand growth than expected. WTI has been consistently below US$55/bbl after W.E. 16-Nov’18. US oil rig count, which is a lead indicator of US shale oil production, is down by 11 from levels in the W.E. 16-Nov’18.
* FY19-TD marketing margins at Rs1.04/l; likely to be up YoY:
Net auto fuel marketing margin at Rs1.3/l in Q3FY19 is up 56% QoQ, 381% YoY and the highest quarterly margin in FY19. Net margin is at Rs5.61/l in the first seven days of Q4FY19 and down just 3% YoY at Rs1.04/l in FY19-TD. Net margin is likely to be up YoY in FY19 vs Rs1.07/l in FY18. OMCs need higher marketing margins in FY19 to make up for the likely high inventory loss.
* Plunge in Jan’19 subsidy improves probability of roll over of FY19 subsidy to FY20:
Rs180bn, which we estimate as FY19 subsidy in excess of budget provision of Rs208bn, is likely to be rolled over to FY20. FY19 budget provision is towards CY18 subsidy while FY20 budget provision would be towards CY19 subsidy. Subsidy in Jan’19 at Rs24.7bn being 43% MoM lower and at the lowest level since Jun’18 increases the probability of roll over of FY19 subsidy to FY20 in our view.