Refineries await IMF deal as margins rise

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As profit margins of refineries rise, they are looking at the signing of a loan revival deal between the government and the International Monetary Fund (IMF), which will push global banks to endorse the Letters of Credit (LCs) for oil import.

At present, the international banks are reluctant to confirm the LCs as they see higher risks for Pakistan.

“This is getting quite serious,” Pakistan Refinery Limited CEO Zahid Mir told The Express Tribune while referring to the hurdles being faced by the refineries in the way of crude oil imports.

He said that currently all refineries were encountering difficulties in getting the LCs confirmed from international banks.

“July supplies can be compromised if the issue is not resolved; IMF deal should be secured soon,” he added. “However, in the domestic supply of crude oil, there are no such issues.”

The gross refinery margins (GRMs) have remained high for June 2022, reaching approximately $26 per barrel and resulting in an average of $25 per barrel for the fourth quarter (April-June) of FY22. They were way higher compared to the margins of approximately $4 per barrel in 3QFY22.

“Refinery margins increased due to the widening HSD (high-speed diesel) and MS (motor spirit) spreads given the European ban on imports of HSD and crude from Russia, depleting inventory and shortage of refining capacity,” remarked Zeeshan Azhar, an analyst at Foundation Securities.

The spread on HSD stands at approximately $57 per barrel in June 2022, resulting in average spread of $49 per barrel for 4QFY22 versus $12 per barrel in 3QFY22.

On the other hand, the spread on MS widened to $42 per barrel in June 2022, leading to average spread of approximately $30 per barrel for 4QFY22 versus $14 per barrel in 3QFY22.

The PML-N led coalition government has recently announced that the government is not in a position to bear subsidies on petroleum products, hence it has decided to increase the price of petrol by Rs24.03, taking it to the record high at Rs233.89 per litre, and the price of diesel by Rs59.16 to Rs263.31 per litre.

HSD spread has widened due to the rebound in consumer demand, which has depleted global diesel inventories to 30-year lows.

The other reason is the lack of European refining capacity amid the ban on purchase of Russian HSD.

However, the Pakistan Refinery CEO has dismissed the talk of high refinery margins on petroleum products.

“Quoted GRMs on petroleum products are misleading and required a thorough assessment in line with the actual crude and oil product prices for the period,” he emphasised.

“The margins of refineries involve multiple factors, which need to be addressed; these margins vary from refinery to refinery and depend on the type of crude being processed and the processing yield at each refinery.”

Moreover, the Pakistan Refinery CEO acknowledged that due to the geopolitical situation since the Russian invasion of Ukraine on February 24, the international oil market had been facing serious supply disruption, resulting in substantially higher margins over the last three months against the preceding nine-month average in fiscal year 2021-22.

Zeeshan Azhar of Foundation Securities said that Attock Refinery GRMs were worked out at an average of $26 per barrel for June 2022 and 4QFY22 versus $8 per barrel in 3QFY22, National Refinery Limited GRMs were estimated at $28 per barrel for June and $27 per barrel for 4QFY22 against $6 per barrel in 3QFY22 and Pakistan Refinery Limited GRMs were calculated at approximately $28 per barrel for June and $27 per barrel for 4QFY22 versus $6 per barrel in 3QFY22.

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