Bangkok: Analysts are forecasting a reduction in the pressure on refinery stocks in the upcoming week.
According to Thai News Agency, Mr. Nattapol Khamthakrue, Assistant Managing Director of Yuanta Securities, has expressed concerns that the imposition of a ceiling on refining margins by the government could lead to negative sentiment towards refinery stocks. Despite this, he emphasized that refineries can justify the recent increase in refining margins following the energy crisis. He explained that while refining margins fluctuate, refineries must continue production during low margins to meet public demand, often incurring losses. Mr. Khamthakrue noted that domestic oil prices are largely influenced by global market prices, suggesting that internal price restructuring may not result in significant reductions in domestic oil prices.
Currently, the sentiment around refinery stocks is somewhat negative, but this is expected to clear next week, reducing the pressure on these stocks. Mr. Khamthakrue recommended considering refinery stocks as part of the broader energy sector, with benefits accruing to both upstream and midstream sectors when oil prices rise. Conversely, these stocks could decline if oil prices fall.
The recent increase in refining margins from approximately 2 baht per liter to around 6 baht per liter has raised questions about the correlation between this figure and refinery profits. Thai news agencies have sought to clarify this distinction, emphasizing that the "refining margin" should not be confused with the "net profit of the refinery."
Gross Refining Margin (GRM) serves as a basic indicator of the refining business, reflecting the price difference between refined oil products and the reference crude oil price. However, it does not represent the refinery's true profit, as operating costs and other expenses have not been deducted. During periods of geopolitical tension, such as conflicts in the Middle East, concerns about oil supply and shipping routes can drive up refined oil prices faster than crude oil prices, leading to increased refining margins.
Despite the rise in refining margins, high margins do not necessarily equate to high profits due to increased costs during crises. These include premiums paid above benchmark crude oil prices, heightened shipping insurance costs, and elevated freight rates. Refineries also face numerous operational costs, such as energy, electricity, maintenance, labor, interest, and taxes, which further complicate profit calculations.
Geopolitical tensions often lead to cost increases across the oil supply chain, impacting refineries significantly. Examples include rising freight rates due to uncertainty in shipping routes, increased marine insurance premiums, and higher crude premiums during tight market conditions. These factors contribute to the complex dynamics of the refining market, where margins can fluctuate dramatically based on global economic and market conditions.
Ultimately, refining margins are a volatile metric reflecting the cyclical nature of the economy and energy markets. They are not a direct measure of profitability, and refineries must navigate these fluctuations while assuming associated business risks.