Refining & marketing - Diesel cracks: Light at the end of the tunnel? - ICICI Securities

Reuters' Singapore GRM has recovered to 8-month high in Oct'20-TD. However, diesel cracks, though up from Sep'20 lows, remain weak and are down QoQ in Oct'20-TD. The following recent data raises hopes of recovery in diesel cracks: 1) diesel consumption in India is up 8.8% YoY during 1-15 Oct vs 6-56% YoY fall in Apr-Sep, and that in US and Spain is down just 4-8% YoY; 2) US refiners' distillate yield is down from 35.8% at peak in Apr'20 to 25.7% in early-Oct'20; and 3) US distillate inventory is down 9% from ~38-year high in end-Jul'20 and, at its recent rate of fall, may decline to 5-year average levels in 6-14 weeks. Recovery in diesel (43-50% of product slate) cracks would boost OMCs' GRMs and share price given that they are pricing-in low GRMs. We reiterate BUY on HPCL and ADD on IOC.

- Singapore GRM at 8-month high, but diesel cracks remain weak: Reuters' Singapore GRM, which is at minus US$0.21/bbl in FY21-TD, is at an 8-month high of US$1.6/bbl in Oct'20-TD driven mainly by petrol cracks. In fact, all product cracks except diesel cracks are up QoQ in Oct'20-TD; diesel cracks at US$2.75/bbl, though up from nadir of US$1.8/bbl in Sep'20, are down QoQ vs US$4.2/bbl in Q2FY21.

- Cracks hit by high inventories and refiners' high diesel yield: Diesel cracks have been hit by high inventories and slower recovery in jet fuel demand, which forced refiners to boost diesel yield. US inventories in end-Jul'20 were at 38-year high while Singapore inventories were at 9-year high in early-Sep'20. US distillate inventories were up 29m bbls in Apr'20 hit by MoM rise in production while consumption and exports were down MoM; production was up 3% MoM to 5.1m b/d despite plunge in US refinery utilisation from 83% to 70% as refiners' diesel yield surged MoM from 29% to 35.8% while jet fuel and gasoline yield fell. Distillate inventory was up 23m bbls in May'20 despite MoM fall in production and MoM rise in consumption on plunge in exports. Inventory rise was modest in Jun-Jul'20; it was due to consumption fall in Jun and production rise exceeding consumption rise in Jul.

- Consumption rise, yield and inventory fall raise hopes of diesel cracks rise: India's diesel demand is up 8.8% YoY during 1-15 Oct'20 vs 6-56% YoY fall in Apr-Sep'20. Spain's diesel demand is down just 7.7% YoY in Sep vs 11-43% YoY fall in Apr-Aug. US distillate demand is also down just 4.3% YoY in Oct'20-TD vs 6.5-14.9% YoY fall in Mar-Sep. US refiner's distillate yield is down to 25.7% in early-Oct from 35.8% in Apr. US distillate inventory in the last 10 weeks is down 9% (15.4m bbls) from peak, but is still 15% (21m bbls) above 5-year average. Inventory decline in the week ended 9-Oct'20 at 7.2m bbls was the steepest in almost 18 years; it was driven by rise in consumption, exports and fall in production (both US refinery utilisation and refiners' diesel yield down). US distillate inventory would fall to 5-year average level in: 1) ~6 weeks if it declines at the same rate (14.8m bbls) as in the last four weeks, and 2) ~14 weeks if it declines at the same rate (15.4m bbls) as in the last 10 weeks. US gasoline inventory decline from its mid-Apr'20 peak to below 5-year average levels boosted gasoline cracks from US$0.1/bbl to US$5.7/bbl in Oct'20-TD. US distillate inventory fall to 5-year average may trigger similar rise in diesel cracks.

Source : Equity Bulls

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