Pakistan’s oil refining industry is currently experiencing a steep decline in profitability, with gross refining margins (GRMs) plummeting to approximately $11 per barrel in September. This is a sharp drop from August’s $33 per barrel and pulls margins below the sector’s five-year average of $13.5 per barrel.
According to a report by Sherman Securities, this downturn is primarily fueled by a surge in supplier crude oil premiums for September and October deliveries. This spike is largely driven by regional security anxieties related to the US-Iran conflict. These escalating costs have heavily impacted the effective margins on high-speed diesel (HSD). Under the current pricing framework, refineries are allowed a specific spread over Dubai crude; however, actual crude premiums have surged to $12-$15 per barrel. This pushes the landed cost of crude up significantly and reduces the effective diesel spread well below the formula’s allowance.
The financial strain is further exacerbated by furnace oil, which is currently acting as a major drag on overall refinery margins. While the cost of crude oil has spiked by roughly 27% since late August for import-reliant refineries, high-sulphur furnace oil prices have stagnated. Consequently, the negative spread for furnace oil widened significantly to around $39 per barrel in September.
Market analysts warn that if these low margins persist, import-dependent refineries could suffer financial losses in the final quarter of the year, potentially hindering the implementation of future refinery upgrade agreements. However, this challenging situation has created a silver lining for domestic consumers. Refineries are currently absorbing a large portion of the international HSD price hike—estimated at $30 to $35 per barrel—passing on a monthly benefit of Rs. 30 billion to Rs. 32 billion to the public rather than raising prices at the pump.