The International Energy Agency (IEA) estimates global oil demand to be highest in five years on weak oil prices.
Global refining margins are up 30 per cent year-on-year (YoY), year-to-date (YTD), calendar year (CY)15 on the back of five-year high petro product demand growth as pump prices remain low. IEA´s projected demand growth over CY15-16 outstrips our estimate of global refining capacity additions by 1.2mbpd. This should tighten refinery operating levels from the current 80 per cent and support refining margins over the medium term. Reliance Industries (RIL) will commission its petcoke gassifiers over 1HFY17 that will lower its operating costs and it remains favourably positioned to benefit from continued buoyancy in refining margins.
Five-year high petro-product demand drives 30 per cent YoY Gross Refining Margins (GRM) increase: IEA estimates CY15 global oil demand growth at 1.8mb/d, led by strong demand growth in gasoline, LPG, and jet kerosene. The US (+500kbpd YoY), China (+783kbpd YoY), and India (+260kbpd YoY) have together contributed 1.5mbpd to incremental demand in CY15. Gasoline demand is growing at strong double-digit rate in China and India. LPG demand in China is up 23 per cent YoY following commissioning of 3.5mt of propane dehydrogenation capacities.
Refinery operating rates should improve aiding GRMs over CY16: Low pump prices should continue to drive strong petro-product demand growth over CY16, with IEA´s expected demand growth slated to outstrip capacity additions over CY15-16 by 1.2mbpd. This should tighten operating level of refineries from the current 80 per cent and support GRMs over CY16-17.
RIL to benefit from buoyancy in refining
RIL derives 67 per cent of its EBIT from refining. We note that each $1/bbl improvement in GRM translates into 9.5 per cent improvement in our FY17ii EPS estimates. The company will commission petcoke gassifiers to lower operating cost/bbl in 1HFY17. Following stabilization of these capacities by FY18, we believe RIL is well-positioned to benefit from tightening global refining operating rates, which should help keep margins buoyant over the medium term.
Accelerating demand should outstrip refinery capacity additions over CY15-16
IEA estimates CY15 global oil demand growth at 1.8mb/d, largely led by strong demand growth in gasoline, LPG, and jet kero. It has upgraded its global oil demand growth estimate for CY15 from +1mnbpd YoY in Jan 2015 to +1.8mnbpd currently due to low pump prices. YTD CY15, the US (+500kbpd YoY), China (+783kbpd YoY), and India (+260kbpd YoY) have together contributed 1.5mbpd to incremental demand. IEA expects 2016 demand growth to be modest at 1.2mb/d.
On the supply side, Yanbu and Ruwais refineries (817kbpd total) have stabilized over 2HCY15. CY2016 capacity additions are estimated at 0.9mbpd. We note that incremental CDU capacity additions are expected to lag demand growth over CY15-16 (3mn bpd). This should help improve refinery operating rates in Asia Pac, supporting GRMs over FY17-18.
China´s strong demand belies underlying weakness in economy
China petro product demand is up 7.5 per cent YTDCY15 led by strength across products, barring gasoil. Gasoline demand is up 11 per cent YoY YTDCY15, led by lower pump prices.
LPG demand up 23 per cent YoY in CY15
Higher propane imports over the past one year have led China´s LPG demand growth. This was due to commencement of six new propane dehydrogenation (PDH) plants for manufacture of propylene in China with combined capacity of 3.5mn tons. However, propylene margins have declined ~45 per cent from their peak over CY15 following a glut.
This could put downward pressure on operating rates and consequently on demand for propylene over 1HCY16.
Petroleum product consumption growth in India remains strong
Petro product demand growth in India is up 8.7 per cent YoY YTD CY15 on the back of high eight-year growth in diesel demand and continuing robust growth in petrol and LPG.
Diesel demand has been growing in double digits for the past two months, up 6.1 per cent YTD CY15. Increased use in agriculture (irrigation pumps) and industry (gensets), reduction in retail fuel prices, and buoyancy in CV sales aided demand growth in the last one year.
Petrol demand has been growing in double digits for over a year now, largely led by buoyancy in passenger vehicle sales, reduction in car dieselisation trend, and lower retail prices. YTD CY15 demand for petrol grew 15 per cent YoY. LPG demand grew 8.3 per cent YoY YTD CY15, led by strong additions in connections by OMCs aiding growth in the domestic LPG segment. Demand for commercial LPG is up ~40 per cent YoY during the period.
This report is authored by Bhaskar Chakraborty, IIFL Capital.