ISLAMABAD: The government has moved to contain a sharp rise in high-speed diesel (HSD) margins by capping the crack spread at $41.89 per barrel over benchmark Dubai crude, according to a report by Sherman Securities.
The pricing mechanism, agreed in consultation with local refineries, will remain in effect for two months unless the international HSD crack spread falls below $41.89 per barrel. The formula is based on the average Dubai crude price and includes additional premium and freight charges.
The HSD spread had surged to around $65 per barrel in recent days because of a global diesel shortage, compared with its historical average of about $20 per barrel.
Sherman Securities said the unusually high spread was considered unsustainable and the market had already been expecting government intervention.
Under the new mechanism, the government will also reimburse additional premium and freight costs when crude is imported from outside the Gulf region, unlike the previous capping arrangement introduced several months ago.
Sherman Securities estimates that the HSD cap could reduce refinery gross refining margins by about $10 per barrel, assuming HSD accounts for 45% of average industry production.
Despite the expected decline, the brokerage said refinery margins would remain healthy. Industry GRMs are estimated at around $19 per barrel after the cap, still well above the historical average of about $6 per barrel.
The research house maintained its “Over-Weight” stance on the refinery sector, saying the market had already anticipated a reduction in the exceptionally high HSD spread of $65-$70 per barrel.
Sherman Securities said the adjustment should therefore have a limited surprise impact on refinery valuations, while margins are expected to remain supportive of the sector.
The report identified volatility in global oil prices, currency movements, changes in refining margins, interest-rate fluctuations and lower refinery offtake due to higher imports as key risks to the sector.
Despite these risks, the brokerage expects the refinery sector to remain supported by relatively strong margins following the government’s intervention.
