Lower diesel crack spread cap to squeeze refinery earnings

Pakistan’s decision to lower the maximum diesel crack spread used in domestic high-speed diesel (HSD) pricing is likely to pressure refinery earnings by restricting the pass-through of higher international diesel margins, Al Habib Capital Markets said in a report.

The federal cabinet on October 19 reduced the maximum regulated HSD crack spread to USD 38 per barrel from USD 41.89 per barrel, a cut of 9.3%, while keeping the minimum spread at USD 11.33 per barrel, the brokerage said.

The change comes as the international HSD crack spread is averaging USD 52.10 per barrel, limiting refiners’ ability to capture the full benefit of elevated diesel margins in domestic ex-refinery prices.

How the pricing works

Under the revised framework, HSD prices will continue to be calculated using a seven-working-day rolling average of Dubai crude prices, Saudi Aramco’s Arab Extra Light premium or discount, and a regulated diesel crack spread, the report said.

The lower ceiling could weigh on gross margins and earnings, particularly for refineries with higher HSD yields, depending on their throughput and product mix.

For its fiscal year 2027 estimates, Al Habib Capital Markets assumes a motor gasoline crack spread of USD 18.21 per barrel, an HSD crack spread capped at USD 38 per barrel and a furnace oil crack spread of negative USD 13.70 per barrel.

Cap cuts upside, floor offers protection

The previous ceiling of USD 41.89 per barrel had given refiners greater exposure to higher international diesel margins. The revised cap reduces that potential upside whenever global crack spreads exceed USD 38 per barrel, the report said.

The unchanged floor offers some protection when international diesel margins weaken, providing a degree of near-term margin stability for refiners.

Uncertainty over duration

However, the mechanism’s three-month validity and the government’s discretion to withdraw it earlier create uncertainty for earnings forecasts and long-term investment planning, including refinery upgrade projects, according to the report.

Al Habib Capital Markets said the overall impact would vary across refiners based on their HSD yields, processing volumes and prevailing international crack spreads.