After a weak performance in oil-to-chemicals segment that impacted Reliance Industries Ltd.'s first quarter earnings, analysts have forecast a muted nine months for the space led by oversupply of refined petroleum products and weak demand on elevated crude oil prices.
However, domestic demand for polymer, polyester, and oil and gas would help the company offset the weakness witnessed in the export market, they said.
RIL's operating profit, or Ebidta, for the O2C segment dropped 23% year-on-year to Rs 15,271 crore in Q1 FY24, as crude oil prices declined 31% YoY. It subsequently impacted the spread of petroleum products that fell 60%-70% YoY and the gross refining margin for the quarter.
“The first quarter of FY24 was once-in-a-generation dislocation of energy markets, which drove fuel margin to historic levels,” said Chief Financial Officer V Srikanth.
The petrochemical environment was soft, because of slower ramp-up of demand from China and continued destocking of products by producers and intermediaries on recession concerns in the west, Srikanth said.
Brokerage JM Financial in a post-earnings report said that global petrochemical cracker operating rate declined 20 basis points sequentially to 77.5% due to starting of new capacities in China and subdued downstream demand in U.S. and Europe for polymers.
The brokerage expects new supplies from China are likely to keep downstream petrochemical margin capped in the near term.
The International Energy Agency estimates global oil demand to grow 2.2 million barrels per day in CY23 to 102.1 million barrels per day despite the macro headwinds, with China accounting for 70% of total demand growth. Increased tourism and improved seasonal demand due to summer in major markets could also propel demand in CY23.
The management, however, expects that voluntary production cuts by OPEC+ countries may keep crude prices elevated and impact demand adversely. Indian downstream exports may also get hit by high inflation, subdued global demand and increased supply from China, according to analysts.
“There is a positive momentum in domestic demand for both polymers and polyesters, and they are likely to track economic growth. But, margins are anticipated to be largely constrained by the increased supply from China,” Motilal Oswal said in a research report.
Upbeat On Fuel Demand
RIL's CFO said that overall demand for oil has been strong during the quarter and opening up of China has only fuelled the demand.
“When you look at India, both demand for oil fuel as well as vehicle sales have actually been very good. It does provide us scope for margin improvements as well as optimisation opportunities,” he said.
According to Citi Research, the ongoing gross refining margin trough could persist in the near term on steady Chinese export flows. However, possible economic run cuts and peak refinery maintenance could limit further GRM downside.
“We see a slightly better outlook over the rest of CY23. Potential yield shift from diesel into gasoline and jet fuel for Chinese refiners could help ease the ‘temporary' diesel imbalance driven by limited disruption of Russian diesel exports after EU sanctions and rising Middle East exports from new capacities,” Citi Research said.
The brokerage also expects that if China's pent-up travel demand continues, there could be gradual reduction of Chinese exports, which would support GRMs over the next few months. But GRMs may not return to record high CY22 levels, it said.
According to analysts, natural gas prices will remain volatile in CY23 due to demand uncertainties in Europe and Asia. Higher EU storage levels, coupled with high nuclear output from Japan and France may dampen demand. However, weather-related variations and high probability of El Nino may create winter demand in Northern Europe. Demand recovery is also likely in China in second half of CY23 aided by the new policy.
RIL had announced commencement of gas production from its third (MJ) field in the KG-D6 block in June 2023. This should help production from the block ramp-up from 21 mmscmd in Q1 FY24 to a peak of 30 mmscmd during the course of the year.
“Gas realisations may, however, decline slightly due to the fall in LNG prices, though this could be supported by production of condensate from the MJ field,” Citi Research said.
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