Gross Refining Margins

A gross refining margin (GRM) measures the difference between the value of petroleum products obtained from refining crude oil and the cost of that crude. It is generally expressed per barrel of crude processed, commonly in US dollars, and indicates the gross value added by refining rather than the refinery’s net profit.

How the margin is calculated

A refinery converts crude into several products, including petrol, diesel, aviation turbine fuel, LPG and fuel oil. Its margin therefore depends on the value of the entire product basket, not the price of a single fuel.

• In simplified terms, GRM = product-basket value per barrel of crude processed minus crude cost per barrel.
• The product-basket value is calculated by multiplying each product’s realised price by its output quantity and adding these values, expressed per barrel of crude processed.
• Product yields and processing losses matter because a barrel of crude does not become a barrel of one uniform, equally priced product.

How crude and product prices change GRM

The decisive factor is the relative movement of input and output prices. A rise or fall in crude prices alone does not establish whether refining margins will improve.

• If crude costs rise while product prices remain unchanged, GRM falls; if crude costs fall while product prices remain unchanged, GRM rises.
• If product prices rise faster than crude costs, GRM widens; if product prices fall faster than crude costs, GRM narrows.
• A crack spread compares a petroleum product’s price with crude prices; it is an indicator of refining economics, but a single-product spread is not the refinery’s overall GRM.
• Demand for individual fuels and the availability of refining capacity influence product prices and can change margins even when crude prices are relatively stable.

Why margins differ across refineries

• The crude slate, meaning the mix of crude grades processed, affects both acquisition costs and the quantities and quality of products obtained.
• More complex refineries can convert heavier fractions into higher-value fuels, so their product mix and margins can differ from those of simpler refineries.
• GRM is not net profit: operating expenses and other charges, including depreciation and financing costs, also affect profitability.
• GRM is not the retail fuel price: taxes, marketing costs and dealer commissions also influence what consumers pay.