Indian refiners are bracing for a decline in profitability in the current fiscal year as refining margins are expected to moderate to $6-$8 per barrel, according to a report by CareEdge Ratings.

This comes after a period of exceptional earnings, with gross refining margins (GRMs) averaging $16-$18 per barrel in 2022-23 and $10-$12 per barrel in 2023-24.

The margin squeeze is attributed to a mix of factors: shrinking product cracks, particularly for diesel, are eroding profitability. Additionally, the narrowing discount on Russian crude oil, a key feedstock, is diminishing the cost advantage.

Geopolitical tensions and production cuts by Opec+ have limited the expected decline in crude oil prices, further impacting margins.

Despite the projected decline, Indian refiners are expected to maintain a comfortable position compared with the global benchmark.

GRMs are forecast to remain above benchmark Singapore GRM of $6.7 per barrel for 2023-24. This strength is largely due to the high capacity utilisation achieved in 2023-24. The refiners have processed 261.55 million tonnes (mt) against a capacity of 256.82mt. Robust domestic and export demand for refined products fueled the high utilisation.

“The availability of relatively cost-competitive Russian crude, a substantial post-pandemic surge in refined product demand and geopolitical disruptions leading to higher demand for Indian refined products from European nations have collectively contributed to Indian refiners consistently achieving significantly higher GRMs than the benchmark Singapore GRMs over the past four years ended 2023-24,” Richa Bagaria, associate director at CareEdge Ratings said.

“Consequently, this has led to an improvement in the credit profile of Indian refiners.”

However, the outlook for marketing margins is less optimistic.

The recent government-mandated price cut of ₹2 per litre on petrol and diesel is likely to moderate margins in the first quarter of 2024-25.