KUALA LUMPUR: Petron Malaysia Refining Bhd's results for upcoming quarters are expected to be weaker following the decline of the Singapore Morgas 92 (Platts) Brent crack spread futures, Kenanga Research.
Kenanga Research, which initiated coverage on Petron, said being largely a refinery, the company's earnings were highly susceptible to the fluctuations of crack spread.
Crack spread is the price difference between the cost of a barrel of crude oil which a refiner buys as input raw material and the selling prices of its output, petroleum products.
"The Singapore Mogas 92 (Platts) Brent crack spread futures have fallen off a cliff from its peak in May-June 2022, and hence, we are anticipating results for the upcoming quarters to be drastically weaker.
"Crack spreads have generally enjoyed a gradual increase since 2021, underpinned by the declined global refining capacity amid refinery closures during the pandemic, low inventories, coupled with improved global demand for petroleum products as the world transitions out of the pandemic," it said in a note.
The addition of the Russian-Ukrainian conflict has pushed crack spreads even further to peak in May-June 2022.
Since then, crack spreads have declined steeply as regional supply has outstripped demand coupled with the inventory build-up, while recessionary fears continue to cast doubts over future demand.
"Therefore, losses can occur if cracking spreads fail to cover the processing cost or when the cost of crude oil simply ends up higher than the selling prices of the end products," said the research firm.
Meanwhile, gasoline product prices were expected to see a mild uptick towards end-2022/early-2023, although it would still be nowhere near the peak we saw in mid-2022, said Kenanga Research.
It noted that the product markets would likely remain shaky until the mid-decade.
"The balance for fuel markets will continue to be fragile in both the short and long terms, with any global unexpected and prolonged outages leading to volatile prices – all while significant extra capacity will be slow to come online," it said.
The firm initiated coverage on Petron with a "Market Perform" call and a target price of RM4.65.