JS Securities Limited – Morning Briefing

Karachi, March 11, 2019 (PPI-OT): Feb-19 GRMs down 48%; MS regional surplus continues to weigh on margins

GRMs for Feb-2019 stood at US$3.61/bbl, down by 48% YoY / 45% MoM.

The 48% YoY drop is due to weakening Motor Gasoline (MS), Diesel (HSD) and Naphtha margins.

On the other hand, sequential downtick in GRMs is a result of weaker spreads of MS, HSD and Fuel Oil (FO).

We expect refinery margins to recover in March due to stronger HSD margins.

Multiyear low Motor Gasoline margins weigh on GRMS

During Feb-2019, gross refining margins (GRM) averaged US$3.61/bbl down by US$3.38/bbl or 48% YoY. GRMs during the month trended lower, mainly due to multiyear record low MS margins (down by 71% YoY to US$1.93/bbl), as the MS market remains oversupplied. Naptha spread slumped to negative US$9.80/bbl from negative US$2.69/bbl, shadowing gasoline weakness amid tempered demand from the petrochemical industry. In addition, Iranian condensate arrivals in South Korea reported during the month provided an alternative source for petrochemical feedstock and further compounded the situation. Other products also show the same trend, namely HSD, KERO and Jet fuel (JP-1), down by 41% YoY, 14% YoY and 13% YoY respectively.

GRMs down MoM as pressure emerged from MS and HSD

On a sequential basis, average GRMs are down by 45% MoM, due to a negative performance in almost every sub-category. MS was down by 53% MoM, followed by HSD, Jet/Kerosene, (down by 32% MoM and 11% MoM) respectively. Margins declined due to lower-than-expected heating space requirements and higher product supplies attributable to the release of additional Chinese export quotas amid an already oversupplied product market.

Weak demand and high supply to keep GRMs in check

We expect refinery margins to recover in the coming month (Mar-2019), especially in the near term due to stronger HSD margins. On the other hand, issuance of additional Chinese supplies will have a negative impact on product markets particularly on MOGAS spread since refineries will most likely increase intakes to capitalize on middle distillates’ shortage. Higher Gasoline exports could worsen the oversupply environment. FO spreads could also weaken in coming months due to an increase in supply after the ban on FO import.

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