Oil mkt over-supplied, prices may not rise significantly: HPCL

When asked if oil marketing companies (OMCs) will increase prices. Surana says product prices are not only the function of crude prices but also of relative demand and supply.

Gross refining margins (GRMs) have been disappointing in the last three to four 3-4 quarters. Analysts say the core refining margins in financial year 2018 could fall to as low as USD 4.8 per barrel. But, Surana is predicting GRMs of HPCL to be in the range of USD 5.5-6 per barrel.Below is the verbatim transcript of MK Surana’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: We saw a 4.50 percent dip in diesel consumption in January according to the Ministry’s data would you worry that as prices rise there is demand resistances?A: Actually, there is a little bit of elasticity on the prices, but the dip in the consumption is more to do with the normal effect post demonetisation rather than the prices. The demands are picking back now. Like in Motor Spirit (MS) already, if we see in February month the growth so far is already 6 percent. So, we assume that slowly and gradually as the effect gets normalised, we should be having the demands picked up again.Latha: Therefore in the next round of potential rise in global crude prices do you still think the Indian sellers, refiners can push up the price?A: As the global crude prices goes up the product prices is not only the function of crude prices, but also a function of the relative demand-supply on the products. So, as the crude prices vary the product prices move not simultaneously but in some lag and depending on the relative supply-demand positions. But, the way we see it, there is a surplus overhang of petrol and diesel in the world market as far as the inventories are concerned. We should not allow it to drastically go up as far as the product prices are concerned because product prices is also function of crude price and the cracks. Crude prices also, we do not believe that it is going to go substantially higher. Of course, there are some potential cuts which has been affected by the OPEC countries and the non-OPEC countries. But, simultaneously, the rig count in US and the production in US has increased and also Libya and Nigeria there are some additional production which has come into the market. There is surplus inventory which was a floating inventory of the crude which has not been soaked up completely as of today. Therefore the market is still over supply and we believe that the crude prices will continue to hover between USD 55-60 in near future. Therefore, I would not be that much worried about the pricing part as of now. Sonia: The other issue we wanted to discuss with you is the way gross refining margins (GRMs) have been disappointing for the last two to three quarters. In fact analysts are forecasting that the core refining margins in FY18 could fall to as low as USD 4.8 a barrel. Is that something that we are looking at and what do you think the trajectory could be in GRMs over the next couple of years?A: No, I don’t think that the GRM of the refineries as far as HPCL is concerned will be that low as you are predicting. We believe that it will be in the range of 5.50 to 6 or maybe a slightly 6 plus as well. By the data which are there for January-February and April- December I got a reasonable belief that we should be closing the year with a GRM around 6.Sonia: How much would the inventory gains be you think over the next couple of quarters because that is something that has been supporting the oil marketing companies as well?A: Actually, there are two factors - one is the cracks and one is the inventory gas. Fortunately, in different quarter sometime the inventory gains effect were there, sometime the crude cracks effect was there. In near future because the crude prices will be moving in the range bound there was not likely to be substantial losses of inventory we assume. The cracks as of today are in the range of USD 14 on MS and around USD 10-11 on diesel. We believe that at least next 2-3 months that is the thing which should be and now the driving season will be restarting. There are certain refineries which will be going for shut down in Asia specifically which should push up the demand for the gasoline and diesel in Indian market. We assume that the crack should remain at this level and which should help the GRM. Latha: Just to drill it down into the expected margins given your assumptions on crude price and on gasoline and on MS cracks what are the GRMs we could work with?A: I think something around 6 will be a reasonable guess. Latha: What kind of throughput will you expect?A: As far as the refinery throughput is concerned, I think we will have the highest ever throughput. In nine months also we had the highest ever throughput for any nine months compared earlier. We are hopeful of that by close of the year also it will be highest ever. As far as the marketing volumes are concerned the January was bit dull, but February is picking up. As I already mentioned to you the MS demand has gone up by around 6 percent. It has registered a growth of 6 percent over the last year. The negative which was there in diesel has come down substantially. If we see the vehicular market which was the negative growth in November and December, January has recorded a 14 percent growth in the vehicles. The negative which was there in commercial market has come down to 0.7 percent. So, we hope the pick of the demand and therefore we should definitely have the higher volume than the last year. Last year we had around 34 million tonne and we should be higher than that this year.