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(Interview Transcript)
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John Vautrain, Sr VP of Purvin & Gertz believes that lower margins for simple refiners are keeping the supplies out of the market. This is favourable for the Indian refiners due to the demand and higher throughputs.
According to Peter Mcguire, MD of Commodity Warrants Australia, diesel may be vulnerable in terms of passing on high crude prices. He said the geo-political tensions and US hurricane season can impact crude prices.
Excerpts from CNBC-TV18's exclusive interview with John Vautrain and Peter Mcguire:
Vautrain: The Gross Refining Margins (GRMs) in Singapore for the simple refineries were off quite a lot from where they were last year. They went through a seasonal downturn over the period between November and April and it is actually back up a little bit this month and are improving slightly. It is a sophisticated refinery, which is not such a bad news, the dip was not so superior and the action stayed positive. What it is doing is that the low margins for simple refineries are keeping some capacities out of the market, so utilizations are fairly low.
Q: Any sense of how this might impact a couple of the listed stocks. There are two Reliance plays over there, Reliance Industries and Reliance Petro that are still to come on track. What kind of slice would you see in their own margin performance?
Vautrain: If you look at the Reliance system it is very sophisticated; those refineries are not at all like the simple refineries who are doing poorly. Reliance refines a very heavy crude at 25 degrees API far heavier than the kind of benchmark crude we normally work with.
McGuire: I think first of all I agree with Mr. Vautrain; couple of quick points there to be considered. We have seen a dramatic sell off in the US dollar over the last six-seven months and now it seems to be rebounding in a bit of a positive territory. So that’s one cause of issue that’s been on everyone’s radar. As far as moving forward, margins maybe squeezed in the face of rising input cost. If the refiners are not able to pass on the increases in their cost then that can create some issues and that’s what we are seeing across many different sectors.
The other side of course is that many times with the rise in crude prices, refiners increase their margins; if we do have some major issues moving forward, then there is going to be dramatic issues across all of Asia and cooling off in the prices itself and we are seeing a little bit of a decrease in demand in China at the moment. We could see that across other Asian sectors over the coming months.
Q: How much of a squeeze do you see in the margin in the near-term as a result of this shortage?
McGuire: It could be as far as 10% that could be about the number.
Q: Which product prices do you think will be the most vulnerable in terms of not being able to pass on the cost of such high crude prices?
McGuire: It may be diesel, but there is a little bit of problem there. If there are ample inventories then they can fill the supply void as these incentivised refiners reduce their production, maintaining the static supply-demand equation. The other side of it could see issues as far as gasoline and oil. So these are major factors we are looking at.
Q: The other part of the argument is that perhaps the simple refineries will struggle a little bit more than the complex refineries; in that context, does anything stand out from the Indian energy stock universe as looking more resilient through these crude pressures?
Vautrain: India is in a fairly good position. The refining sector there had some very favourable demand developments in the country. The demand has increased quite a lot, imports are up and so most of the major marketing companies are scrambling to find adequate supplies to sell and they are finding them. In these days of high overall crude prices, those aren’t that bad. So I expect the refining throughputs will stay high in India.
The refinery product pricing system in India works better than it does in some of the other places like China, where the prices are controlled down at retail levels and the refineries really suffer a lot, even negative margins in the most sophisticated refineries in China. I don’t think that we have seen that in India, so I expect things to be relatively good there.
Q: I’m not sure whether you track any of these pure exploration plays but the correlation with crude has been extremely strong, almost 90% I think. Would that be the space to continue to bet on for the rest of the year if you have to pick something in energy?
Vautrain: Crude has been very strong. There is a lot of sentiment out there that perhaps is due for correction. I think the underlying demand trends are getting to be a little more clouded. As Peter McGuire mentioned some softening of demand, we have seen that around the world particularly in US. If the US has been very strong historically, this year things are off quite a lot and that’s the place where globally the refining stocks are probably the weakest. They are suffering a lot and even cracking refineries are shutting down capacities in US and that’s very unusual.
Q: What does it mean for the alternative sources of energy such as gas and diesel?
McGuire: If we are talking about gas and diesel there are alternatives we can look at - bio-fuels, corn production, ethanol all of that debate and that will only increase, the price of crude goes higher and so that is the first pattern. That effects food consumption and we have seen explosive growth over the last year and a half to two years with soybeans, corn, and sugar and wheat.
Q: And what is the level that you are watching out for crude?
McGuire: In crude there are couple of quick points; 18 months ago crude was sitting at USD 60/bbl and then in mid-January of ’07 it hit a USD 50/bbl, now it is up 150% at USD 123/bbl and USD 124/bbl. I think we have got to join on a table together and flip a coin because you wouldn’t know whether it is going to hit USD 150/bbl, or it is going to be USD 100/bbl within the next 6 months.
There are many factors at play, but if the geopolitical tensions increase that’s the first part; if we have any issues this year with hurricane damage in United States and we are entering that season and we have got possible increasing demand from drivers staying at home and across the world, then you could see prices go a lot higher than where we are at the moment and I am almost saying that Goldman Sachs is wrong at USD 200/bbl in the next couple of years and I think it is quite achievable.
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