ISLAMABAD: Pakistan’s oil refining sector is facing renewed financial pressure as gross refining margins (GRMs) fell to around $11 per barrel in September, well below the five-year average of $13.5 per barrel, amid a sharp rise in crude premiums and worsening furnace oil economics.
According to a research report by Sherman Securities, refinery GRMs had averaged around $33 per barrel in August 2026, making the September decline particularly severe. The brokerage attributed the deterioration mainly to a $12–15 per barrel increase in supplier crude premiums for September and October deliveries amid heightened security concerns linked to the US-Iran conflict.
Crude Premiums Squeeze Diesel Margins
Sherman Securities said the government needs to revisit the existing diesel pricing mechanism to account for the significantly higher crude premiums.
Under the current formula, the maximum diesel price allows refineries a $41.89 per barrel spread over Dubai crude, while incorporating a negative crude premium of $1.5 per barrel and freight of $8 per barrel.
However, crude premiums for September deliveries have climbed to around $12–15 per barrel due to security concerns. Assuming Arab Light crude at $95 per barrel, the landed crude cost is estimated at approximately $115 per barrel after adding the premium and freight.
With HSD prices recently around $148 per barrel, the effective diesel spread is therefore only about $33 per barrel, substantially below the $41.89 per barrel spread incorporated in the official pricing formula.
The brokerage proposed either incorporating the actual $12–15 per barrel crude premium into the pricing mechanism or removing customs duty on high-speed diesel (HSD).
Furnace Oil Economics Deteriorate
The second major drag on refinery profitability is high-sulphur furnace oil (HSFO), where the negative spread has widened sharply because of weak global demand.
While crude costs have risen substantially, furnace oil prices have remained stagnant at around $76 per barrel during September. Crude costs, including premiums, have increased by approximately 27 per cent for Pakistan’s import-dependent refineries since the end of August.
As a result, the negative furnace oil spread has widened from around $15 per barrel in August to $39 per barrel in September, significantly eroding overall refinery margins.
Petrol economics have also weakened, with the motor spirit (MS) crack spread falling to around $14 per barrel, compared with an average of $27 per barrel in August.
The latest product-wise spreads cited by the brokerage were:
HSFO: -$39.4/barrel
HSD: $32.5/barrel
Motor spirit: $14.2/barrel
Jet fuel: $30.7/barrel
The underlying crude oil price was estimated at around $116 per barrel.
Refineries Absorb Higher Diesel Costs
The report also highlighted what it described as a substantial margin sacrifice by domestic refineries on diesel.
According to Sherman Securities, local refineries are foregoing around $30–35 per barrel on HSD by absorbing higher international diesel prices rather than passing the full increase on to domestic consumers.
The brokerage estimated that this effectively provides consumers with a benefit of approximately Rs30–32 billion per month.
Sherman Securities warned that refineries heavily dependent on imported crude could face losses in the December quarter if current GRM levels persist. The margin squeeze could also complicate the implementation of refinery upgrade agreements.
The deteriorating economics underline the need for a review of Pakistan’s petroleum pricing mechanism to ensure that refineries can recover their actual crude procurement and operating costs while maintaining sustainable domestic fuel supplies.
Story by Khalid Mustafa
