Russia's disrupted oil trade squeezes profit margins for Indian refiners

By Serene Cheong and Elizabeth Low

India’s state-run refiners are facing a shift in fortunes as once cheap Russian oil becomes more expensive and less accessible, squeezing profits for companies that had been benefiting from Moscow’s war in Ukraine.
 

Attacks in the Red Sea have driven up freight rates, while tougher US sanctions have stranded some Russian cargoes destined for India, adding to costs. That may force some processors to buy more pricey barrels from suppliers in the Middle East, eroding profit margins even more, say traders and analysts.

India has to import 88 per cent of its crude needs and the nation took advantage of cheaper Russian oil following the war in Ukraine as others shunned Moscow’s barrels. But the trade, which has helped put the state-owned refiners on track for a rebound in net income this year, is under pressure.

Gross refining margins for processors including Indian Oil Corp. dropped in the previous quarter due to higher freight rates, said Hardik Shah, director at credit ratings and analytics firm CareEdge Group. The company estimates lower margins for refiners so far this financial year, but they are still higher than pre-war levels.

The state-run processors primarily sell fuel domestically and don’t get the benefit of higher prices overseas, unlike the export-focused private processors including Reliance Industries Ltd. — which also have more flexibility on buying and payments for Russian crude.

Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp. didn’t immediately respond to emails seeking comment on margins.

CareEdge predicts overall margins should hold around $10 a barrel, as long as crude prices stay below $90, a level that global benchmark Brent hasn’t been above since October. Futures traded near $83 on Thursday.

The attacks on shipping in the Red Sea by Houthi rebels have also spilled into global fuel trade. Arrivals of fuel from India to Europe averaged just 18,000 barrels a day in the first two weeks of February, a plunge of more than 90 per cent compared with January’s average, according to Vortexa Ltd.

The disruptions will likely lead to some impact for Reliance and and Nayara Energy Ltd., although they still have export options across Asia and Africa. Cheaper Russian oil has allowed India’s refiners to be more competitive than their peers in South Korea, Singapore and across the world.

If India loses the Russian advantage on crude, whatever marginal refining edge it had will be gone, according to Mukesh Sahdev, the head of oil trading and downstream research at Rystad Energy.