RIL's petrochemical business to help offset falling crude oil shock

Reliance Industries would fare comparatively better in an environment of falling oil prices because of its scale and complexity and its capacity expansion in the petrochemicals businesses over the next 12-18 months, analysts said.

The $10-billion petrochemicals expansion will help the Mukesh Ambani-led company to offset declines in refining earnings. “Crude oil prices will impact Reliance Industries’ gross refining margin by at least $1.5 a barrel this quarter,” said Phani Sekhar, fund manager with Angel Broking.

In the September quarter, Reliance Industries’ gross refining margin was $8.3 a barrel, up from $7.7 in the same quarter of 2013-14. Besides, Reliance Industries’ premium over the regional benchmark widened to $3.5 a barrel from $2.5 a barrel in the corresponding period previous year, aided by wider crude oil price differentials and the sourcing advantage. Crude oil prices are down 30 per cent since June and fell towards $72 a barrel on Friday.

Reliance Industries’ revenue in the September quarter fell by 4.7 per cent to Rs 1,13,396 crore and the company blamed it on crude oil prices and volumes in the refining and oil and gas business. On the positive side, Reliance Industries’ cost of raw materials was also lower by 12.9 per cent in the September quarter due to lower crude oil prices.

Industry analysts said unlike other Asian refiners, which bought most of their crude oil from the West Asia, Reliance Industries was buying crude oil from wherever it could secure an attractive price. Many oil refiners across Asia are sitting on inventories of expensive crude oil. Since Reliance Industries also sells its products in advance based on earlier crude oil prices, it will be able to withstand the price fall better.

Reliance Industries’ rival, the government-owned Indian Oil reported a loss of Rs 1,897 crore on inventories for the September quarter. All refining companies would be hit by expensive inventories in the current quarter ending December, analysts said. But Reliance Industries’ petrochemicals business would chip in by the end of next year, they added.

Most Indian refiners keep 15-18 days of inventories and are planning to bring this down to a minimum as crude oil prices fall. If oil prices fall further, the margins of all Indian oil refiners, including Reliance Industries, will be affected.

“The sharp fall in crude oil prices has resulted in the light-heavy crude spread narrowing to $2.8 previous week, impacting the complex refining margins and gross refining margins of Indian companies,” said Chirag Kabani, a Mumbai-based analyst.