Refinery margins at 2-year high on diesel crunch

Despite a decline in the international crude oil market, margins of refineries have increased significantly, reaching two-year highs in the current month, primarily due to diesel shortage, which has also pushed margins up globally.

After plunging to the low of $4.5 per barrel in April 2025, gross refining margins (GRMs) of local refineries have improved during November, climbing to $13.3 per barrel – a nearly two-year high. Analysts say this is positive for local refineries as their earnings are directly linked to changes in GRMs. The highest GRM was recorded at $27 per barrel in July 2022 while the average GRM over the last five years (calendar year 2020-24) stood at around $8 per barrel.

While international crude oil markets have endured a bearish trend, diesel shortage is keeping fuel prices steady, thereby pushing up refinery margins. Recently, the US and EU sanctions on Russia's key oil suppliers have created the scarcity of diesel as Russian crudes are ideal for producing a higher proportion of mid-distillates such as diesel and jet fuel. These sanctions have sent shockwaves through the product market because refiners will need to readjust their crude sources, potentially affecting their production lines in the short term and creating a demand-supply gap for mid-distillates.

"This comes at a time when many refiners in the Middle East and Europe are planning turnarounds, while demand for diesel, particularly in Europe, remains elevated," analysts at Sherman Research said. Local refineries are now fetching stronger spreads on diesel as prices have remained steady, though crude oil has dipped.

International diesel prices, including import duty, are currently hovering around $96 per barrel compared to the average Arab Light crude rate of $66 per barrel. Diesel is now at its highest level since February 2025, when Arab Light was trading around $81. Furnace oil, a negative-margin product, continues to pose challenges to local refineries as domestic demand has become negligible following the imposition of a carbon levy. Refineries are shipping furnace oil to export markets.

Currently, furnace oil is trading at an average of $51.5 per barrel, reflecting a discount of $16 to the Arab Light crude. If exported, furnace oil may face an additional discount of $1-2. "Despite the widening negative spreads on furnace oil, we believe PRL (Pakistan Refinery Ltd) and NRL (National Refinery Ltd) are well positioned to benefit from the current margin environment as both have the highest share of diesel in their product slates," the analysts said, adding that for NRL, diesel accounted for 54% of its energy products, while at PRL, diesel made up around 50% of total production.

Meanwhile, refineries have been struggling for more than a year because of sales tax exemption, which have eroded their financial health. In the previous year, the tax break caused a loss of Rs34 billion to the refineries and oil marketing companies. Later, the government allowed the refineries to recover the losses.

The government had assured them that it would impose up to 5% sales tax but it hinged on approval of the International Monetary Fund. It took up the matter with the lender but no solution could be found.