Reliance Industries Ltd. is best-placed to gain from a strong refining sector, according to Nomura, which has reiterated a 'buy' rating on the stock despite declining refining margins.
Last week, the energy market saw significant fluctuation as Brent futures rose 6% on Oct. 13, primarily driven by the geopolitical risks associated with the ongoing Israel-Hamas conflict.
Benchmark refining margins declined 6% week-on-week, falling to $4.8 per barrel of crude oil for the week ending Oct. 15, from $5.1 per barrel the previous week, as per a Nomura report on Oct. 16. This drop was attributed to decreases in various products, except for fuel oil.
The brokerage notes upside risks to its conservative refining margin estimate for Reliance Industries of $12 per barrel for FY24.
Refining Margins Decline
A $1 increase in refining margins led to a 2% rise in Ebitda and a 4% increase in Reliance's earnings per share, according to Nomura. The company also benefits from its advantageous crude oil sourcing, which will keep realised margins at a significant premium to benchmark margins, the brokerage said.
Regarding key refining margins, the Reuters Singapore complex refining margin dropped significantly by 49% from the second quarter to $4.9 per barrel. This decline is mainly due to reduced spreads for most products, except for LPG. Fuel oil spreads improved slightly but remained negative, while LPG spreads decreased.
Diesel spreads dropped 5% week-on-week due to Russian export policy changes. Gasoline spreads also fell by 4% week-on-week, influenced by reduced European Union and U.S. demand.
Marketing Margins
Blended marketing margins improved to -Rs 1.7 per litre in the week ending Oct. 15, from -Rs 4.6 per litre in the prior week, said Nomura. Oil marketing companies now face under-recoveries of Rs 4.4 per litre on auto fuel sales, it said.
On a quarterly basis, blended marketing margins have fallen to -Rs 3.1 per litre in Q3 till date, from Rs 1.6 per litre in Q2 FY24. This is due to rising crude prices, while retail fuel prices remain constant, Nomura said. Due to rising international prices and constant pump rates in India, diesel marketing margins have plunged into negative territory at -Rs 5.2 per litre, compared to Rs 1.1 per litre in Q2. While gasoline margins till date in Q3 have remained steady above normative levels of Rs 3.1 per litre.
Risk To Oil Markets
While oil flows remain uninterrupted for the time being, the Israel-Hamas conflict remains volatile, and any further deterioration of the situation will have a material impact on oil prices, according to Nomura. The brokerage expects oil prices to remain elevated until de-escalation occurs.
As the war rages on, the geopolitical risks for oil markets are rising, the brokerage said. While the U.S. has constantly been attempting to keep Iran away from the war, any direct involvement of Iran could lead to further tightening of US sanctions on the country, it said. These sanctions, which were eased prior to the war, enable Iran to increase production by 0.5 million barrels per day to 3.1 million barrels per day now, said Nomura.
Any retaliatory measure by Iran to attempt to block the Strait of Hormuz, which accounts for 17 million barrels per day of oil and product flows, will significantly upend markets, according to the brokerage.
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