How fuel price hike will Impact RIL?
The prices of auto fuels were revised for the first time in over four months earlier this week.
Polyethylene (PE), polypropylene (PP), and poly(ethylene terephthalate) (PET) – have not seen the steep rally witnessed in feedstock naphtha price in the last month. As a result, margins have declined to multi-year lows. However, RIL’s integrated operations will see a lower impact as it captures the naphtha spreads. China’s Zero-Covid policy and property sector curbs were already affecting petrochemical margins. The recent spike in Covid cases in the mainland has led to renewed restrictions that will further weaken downstream demand and likely keep margins weak over most of the CY2022.
RIL benefits from higher oil when there is a rise in petrochemical average selling prices. This normally happens with a lag of a few months, it eventually helps RIL’s profitability.
RIL is a net beneficiary of higher sustained oil prices, especially in an environment when oil demand is rising and supporting refinery margins and the U.S. and Asian gas prices, which are input for its chemicals and utility usage underperforming oil.
Assuming some normalization of margins from current levels, the fall in petrochemical profitability could offset the refining improvement over Q4FY22-H1FY23e.
The Gross Refining Margins (GRMs) have been strong due to low inventory levels along with the supply-chain constraints, due to ongoing geopolitical tensions (Russia-Ukraine war). Low inventory in US and EU are going to keep diesel spreads uplifted (Q4 avg at $17/bbl vs Q3 $12/bbl). Along with resilient gasoline spreads of $16/bbl, the RIL is expected to benefit from the elevated spreads. The estimated GRM assumptions for FY23/24 rose by 17% to $10.5/bbl.
Spot LNG prices have been on an upswing and averaged USD35/MMBtu in Q3FY22 (+90% QoQ), led by higher demand from the EU. Amidst the Russia-Ukraine war, gas prices are likely to remain at higher levels. Recently, RIL has placed 0.65mmscmd CBM gas at USD22/MMBtu (13.2% of Brent + USD8.28/MMBtu premium) given the tight market conditions as there is no cap on pricing. Accordingly, RIL’s KG gas prices are expected to see a sharp revision by ~59% to USD10/MMBtu for FY23/24E over the H2FY22 average of USD6.13/MMBtu. Also, RIL’s KG D6 MJ filed volumes will start from Q3FY23 which will increase gas volumes by 67%/12mmscmd to 30mmscmd.
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