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Under-recoveries expected to decline sharply; weak light distillates pull down refining margins

§ During June 2012, Brent crude prices continued to decline and averaged US$95.6/bbl compared to US$110.1/bbl in May. Indian basket of crude oil averaged US$94.8/bbl. Dubai-Arab Heavy spread recovered from lows and averaged US$1.4/bbl.

§ Singapore refining margins declined during June 2012, averaging US$5.64/bbl compared to US$7.24/bbl in May 2012. Light distillate cracks weakened during the week, pulling down refining margins. Weak US gasoline demand led to fall in gasoline cracks. Naphtha cracks also declined on account of weak downstream demand and increased supplies from India and north East Asia. Middle distillates cracks remained flat during the month. For 1QF13, Singapore refining margins are down to US$7/bbl compared to US$7.6/bbl in 4QF12.

§ HSD and SKO cracks averaged US$15.15/bbl and US$15.83/bbl against US$15.67/bbl and US$16.43/bbl in the previous month. Gasoline cracks declined and averaged at US$12.95/bbl compared to US$18.5/bbl in May 2012 (see page 3).

§ Marketing under-recoveries on auto fuels are expected to decline sharply on account of fall in oil prices and relatively stable currency. For diesel, LPG and kerosene, we have estimated under-recoveries at Rs7.8/litre (Rs9.7/litre), Rs325/cylinder (Rs411/cylinder) and Rs25.8/litre (Rs27.3/litre), respectively (see page 5 for trends in under-recoveries.

§ Domestic production of crude oil remained stable and natural gas production declined by 11% on YoY basis during May 2012. (see page 7).

Petrochemical margins improve led by decline in feedstock prices

§ Last month witnessed sharp fall in feed stock prices with relatively lesser fall in petrochemical prices, leading to expansion in margins. During the month of June 2012, cracker margins averaged US$171/tonne compared to US$135/tonne in May 2012. For 1QF13, cracker margins improved to US$163/tonne compared to US$121/tonne in the previous quarter due to sharp decline in naphtha prices.

§ Sharp fall in ethylene prices resulted in expansion in non-integrated PE margins, which averaged US$434/tonne compared to US$246/tonne in May 2012. During 1QF13, margins increased to US$260/tonne compared to US$160/tonne in 4QF12.

§ Weak naphtha prices resulted in improvement in integrated PE margins as well, which averaged US$692/tonne compared to US$469/tonne in May 2012. 1QF13 witnessed 38% QoQ improvement in integrated margins to US$511/tonne. Improvement is due to sharp dip in ethylene cash costs.

§ PP prices declined during the month leading to decline in polypropylene (PP) margins. PP margins averaged US$101/tonne during June 2012, compared to US$159/tonne in May. However, on QoQ basis, PP margins improved to US$105/tonne compared to US$19/tonne in the previous quarter.

§ PVC margins remained flat MoM at US$498/tonne. For the 1QF13, PVC margins averaged US$482/tonne compared to US$431/tonne in 4QF12.

§ Polyester margins (POY-0.86 PTA-0.34 MEG) increased in June 2012 to Rs18.4/kg (16.1/kg in May 2012). PSF margins increased to Rs21.2/kg (Rs18.9/kg in May 2012). Trend in fibre intermediates margins was mixed with PTA-PX margin declining to US$114/tonne and MEG-Ethylene recovering sharply to Rs29.8/kg (Rs19.7/kg). For the 1QF13, polyester margins were flat to positive across the product chain

EIA energy outlook

§ After a growth of 0.8mn bpd in 2011 to 87.9mn bpd, Energy Information Administration (EIA) expects world consumption to grow by 0.8mn bpd (down from last month forecast of 1mn bpd) in 2012 and 1.1mn bpd in 2013 (down from last month forecast of 1.3mn bpd), lower than average global demand growth of 1.3mn bpd from 1998-2007. China and other emerging economies account for most of the projected crude oil and liquid fuels consumption growth over 2012 and 2013. OECD consumption declined by 0.4mn bpd in 2011 and is expected to continue to decline in 2012 and stabilise in 2013 led by expected growth in US.

§ In terms of supplies, EIA projects non-OPEC crude oil and liquid fuels production to increase by an average 800,000bpd in 2012 (up from last month estimate of 700,000bpd) and further by 1.2mn bpd in 2013 (last month estimates of 1.1mn bpd), led by rise in production in North America up 890,000bpd and 470,000bpd in 2012 and 2013, respectively. In addition, Brazil production is expected to rise by 140,000bpd in the next 2 years. Incremental production is also expected from China, Kazakhstan, Columbia and Norway. However, Russia, Sudan, UK and Mexico will be a drag with a negative growth.

§ EIA expects OPEC members’ crude oil production will rise over the next 1 year, followed by decline in 2013. OPEC crude oil production is expected to increase by ~0.9mn bpd in 2012 and decrease 500,000bpd in 2013. Decline in 2013 is due to expected decline in production from Iran. EIA projects that OPEC surplus production capacity will average 2.5mn bpd in 2012 and rise to 3.4mn bpd in 2013.