China could be a disruptive force in oil products market: Vandana Hari, Vanda Insights

In a chat with ET, Vandana Hari, Vanda Insights, says the crude glut story over the past two years has also been changing a little bit into a product glut story. That does not mean a very good outlook for refining margins. Edited excerpts


Reliance result indicates that a new cycle or a fresh cycle actually started in the oil market and in the petrochemical market?

The jury is still out on whether the stocks are actually coming down globally or not. In fact, earlier this week at an oil conference in London, the ExxonMobil CEO was saying that the outlook for crude prices is not too good because there is plenty of product stocks and crude stocks globally.

Now as you just mentioned, refining is very cyclical. When margins are good, all refiners start increasing their operating rates and as a result more products are available in the market, bringing down refining margins.

Now, this year the refining margins have fluctuated quite a bit. The GRMs have fluctuated anywhere between just under $4 and just under $7 a barrel. They have been a little bit better this month and generally going into the winter demand season they should be better. Having said that, the other thing you need to keep also is that China has been a major disruptive factor this year, the small refineries in China typically tend to produce 100,000 barrels per day. They have got a fresh boost with the government giving them permission to import crude and export products and they have put up a lot of refined product out into the market as well. So overall the crude glut story over the past two years has also been changing a little bit into a product glut story. Now that obviously does not mean a very good outlook for refining margins.

We will keep the stock market angle aside but I want to understand the global market environment from you. GRMs are the mainstay for Reliance and GRM is where in your opinion, we should not get excited. Why has Reliance historically enjoyed margins which are at least 15% to 20% premium than what the Singapore GRMs are?

There are a few reasons. First of all, Reliance is a highly sophisticated refinery. On the Nelson Complexity Index, it is the most complex refinery probably anywhere in the world. They also have economies of scale. It is a massive refinery. It is capable of essentially taking the dirtiest of crude, typically high sulphur crude, very acidic crudes which are typically available at steep discounts to your sweeter crude and lighter crude. So it is able to take these and transform them into the most clean product, euro 5.

Essentially, a margin for a refiner is the difference between how cheaply can you get your crude and how high can you sell your refined product for and, of course, it exports essential part of its production as well. So traditionally when Indian gas oil had subsidies, Reliance did not suffer as much as compared to its state owned peers.