A concerning development has emerged in the petroleum sector, revealing a substantial decline in gross refining margins (GRMs) for local crude refiners during the fourth quarter of FY23. These GRMs have plummeted to an average of US$4 per barrel, marking the lowest quarterly margin observed over the past two years. The sharp decline in GRMs raises concerns regarding the potential for numerous refineries to incur losses.
In contrast, the same period in the previous year saw a notable high of US$22 per barrel for GRMs, a result of the global scarcity of refined products following the Ukraine-Russia conflict. However, between April and June of FY23, the global crude and product markets followed divergent trajectories.
Arab Light crude oil prices decreased by 3%, while key product prices faced reductions ranging from 4% to 25% in US dollar terms. This shift in market dynamics contributed to the decline in GRMs.
The Gross Refinery Margin (GRM) serves as a crucial financial indicator used to evaluate the profitability of a petroleum refinery’s operations. It gauges the difference between the total revenue generated by selling refined products, such as gasoline, diesel, jet fuel, and petrochemicals, and the cost of the primary input for the refining process, which is crude oil.
The start of FY24 provides a glimmer of optimism for local refineries, as GRMs have experienced a slight rebound during the initial months of the new fiscal year.
Additionally, there is the potential for significant inventory gains due to price increases, which could offer some relief to the industry.
However, despite these positive signals, the average local industry GRM of US$4 per barrel from the previous quarter remains insufficient to cover processing costs. This leaves the refining business in a loss-making position, with direct and indirect costs of refining one barrel of crude oil exceeding the $4 mark.