Refinery margins fall five per cent

KARACHI:

Refining margins for the local industry declined by five per cent to $3.72 per barrel on a monthly basis in February.

The benefit of deemed duty increased to its highest monthly level of $3.02 per barrel after a six per cent increase in oil prices, which moved above $100 per barrel for the first time since September 2008.

Ignoring the duty impact, margins would have been down by a massive 37 per cent on a monthly basis, according to Elixir Securities.

Deemed duty is a tax the government lets refineries charge in order to sell locally-produced diesel at the same price as imported diesel. This was imposed to protect refineries from volatility in international oil prices.

Naphtha spread weakens significantly

Naphtha was the only major contributor to the contraction of gross refining margins with a negative spread of $5.13 per barrel. The major cause of weakness in naphtha spread was the decline in demand from petrochemical complexes, which used light diesel oil partly instead of naphtha as feedstock, said Elixir Securities analyst Ali Ahmed Tiwana.

Elevating regulatory risk

In order to limit the increase in petroleum product prices, the Oil and Gas Regulatory Authority announced arbitrary prices for light diesel oil and kerosene in March.

The price for light diesel oil fell four per cent to Rs2.32 per litre while kerosene fell five per cent to Rs2.74 litre. This is a virtual suspension of the pricing formula and there is a risk of future deemed duty reduction in a high oil price scenario, said Tiwana.

With a significant reduction in petroleum levy, the government is left with very little room to absorb any increase in oil prices going forward, added Tiwana.

Arab light crude price has averaged $110 per barrel in March so far. Assuming price stays at $105 per barrel for the remaining month, ex-refinery prices will need to be increased by Rs3 to Rs9 per litre from April onwards, said Tiwana. This could lead the government to cut ex-refinery prices or deemed duty on high speed diesel.

Published in The Express Tribune, March 19^th, 2011.