We expect RIL to benefit from its nil fuel oil yield and ability to process heavy sour crudes and HPCL to be negatively impacted given its high fuel oil yield.
Our calculation of India refining margins benchmarked to domestic refined products mix shows moderate improvement in 3QFYTD from 1HFY20 levels contrary to decline in Singapore complex margins. Imminent implementation of IMO 2020 rules for marine fuels has already driven a sharp correction in fuel oil spreads and an increase in sweet-sour crude premiums, both may continue in the near term.
We expect RIL to benefit from its nil fuel oil yield and ability to process heavy sour crudes and HPCL to be negatively impacted given its high fuel oil yield. We introduce Kotak India refining margins index linked to the product slate of domestic refining industry with 8% fuel and loss, Singapore product prices and Dubai crude oil prices and notional import duty differentials.
The widely-tracked Singapore complex refining benchmark has exhibited significant disparity in the recent months due to sharp volatility in high sulfur fuel oil (HSFO) spreads amid imminent implementation of IMO 2020 rules for marine fuels and (2) intermittent spike in freight rates due to the US sanctions on a Chinese shipping company. We understand that Singapore complex refining margins calculation is linked to ~26% HSFO yield and relatively lower diesel yield, which is at a significant variance to ~4% fuel oil and ~43% diesel cumulatively produced by the Indian refining industry in 1HFY20.
Kotak India refining margins has improved in 3QFYTD contrary to decline in Singapore complex. Our computation of Kotak India refining margins has improved to an average of $7.6/bbl in 3QFYTD from $5.4/bbl in 1HFY20, contrary to the sharp decline in Singapore complex refining margins to $2.5/bbl in 3QFYTD from $5/bbl in 1HFY20.