 "Russian Oil, crude oil, oil, oil prices")
India's economy, already troubled by shrinking global demand for its goods and services, faces a double whammy in rising crude import costs from surging oil prices and shrinking supplies of discounted Russian oil.
India is staring at a spectre of soaring crude prices and lower shipments from Russia, its biggest oil supplier, and from its traditional West Asian crude sellers after output cut announcements by Saudi Arabia and Russia sent Brent crude to its highest level this year, climbing 25 per cent in the last three months to over $90 a barrel.
Saudi Arabia and Russia said on Tuesday that they will extend their unilateral additional voluntary cuts of 1 million barrels per day (bpd) and 300,000 bpd respectively in crude oil supply until December.
These cuts come on top of combined Opec-plus cuts of more than 3.6 million bpd implemented in November 2022 and May 2023.
In India, soaring global oil prices will be juxtaposed against a recent cut of 18 per cent in the rate of LPG cylinders, an ongoing 17-month freeze in pump prices of petrol and diesel, a revival of under recoveries, or revenue losses, at state refiners, and uncertainty on how much it will cost New Delhi to compensate them.
Upcoming federal and state polls further complicate matters.
That leaves Indian state oil companies caught in the crosshairs of higher oil prices, supply cuts, impending elections and growing losses.
Cost savings of around $8-$10 billion from Russian crude in the last 18 months also kept the country’s current account deficit lower, according to customs data on prices and volumes, and industry estimates.
Refiners will face mounting marketing losses as crude strengthens, said Prashant Vasisht, senior vice-president, and group co-head at ratings agency ICRA.
Diesel was already carrying a negative marketing margin of -Rs 2/l in the first half of August.
Expanding crack spreads on diesel has also sent marketing margins into negative territory, he said. Marketing margins on diesel, India’s biggest consumed fuel, dropped to a negative Rs 2.9 per litre from +Rs 10.3 a litre in the April-June quarter, according to a September 5 note by Nomura.
Losses will widen further after European-benchmark Brent crude, a peg to calculate Russian oil prices, crossed $90 per barrel for the first time since November.
Goldman Sachs said in a note on Monday that the OPEC+ heavyweights Russia and Saudi Arabia and Russia, the world’s second and third biggest oil producers, will keep supply lower for longer, setting a $93/bl 12-month price target for Brent. UBS Global Wealth Management expects Brent to jump to $95/bl.
Cheap, copious supplies from Russia had enabled state-oil refiners to post over Rs 30,000 crore in combined profits in the April-June quarter of fiscal 2023/24, despite keeping prices of petrol and diesel unchanged, according to company data.
But the second half of calendar 2023 will sharply slash the savings enjoyed by these companies as crude turns costlier, and Russian supplies shrink, analysts and industry sources said.
Russia's overall August exports (excluding shipments to neighbouring Belarus) were down by about 340,000 bpd compared with the average for the first seven months of this year, according to estimates by UK-based market intelligence provider Energy Intelligence.
Russia supplied around 44 per cent of India's oil in July before declining to 36 per cent in August, according to data from Paris-based market intelligence provider Kpler.
Supplies of discounted Russian oil to India will moderate to 1.5 million bpd, or even lower, for the next few months compared to over 2 million bpd in July, a drop of 25 per cent or 0.5 million bpd, an official from a state-run refiner said.
It means these companies need to source at least 15 million barrels every month from more expensive spot or Gulf sources to make up for Russian reductions.
In July, Russian oil at $68/bl was cheaper than Iraqi Basrah grades by around $5 a barrel on delivered basis, according to Indian customs data. Cost savings over Saudi shipments were close to $14 a barrel, and by $20 a barrel over UAE and US deliveries.
Given Iraqi limitations in increasing supplies, India may have to rely on UAE, Saudi Arabia and the US to compensate for lower Urals volumes but incur at least $150-$200 million in higher sourcing costs every month, according to calculations based on customs data.
Moreover, discounts on Russian benchmark Urals supplies have also dropped from April levels, reducing further the cost advantages gained from sourcing Russian oil. Discounts averaging $6 a barrel are half of the discounts available in early 2023, a Mumbai-based trader said.
The cut in LPG prices by Rs 200 for a 14.2kg cylinder also leaves refiners with less money on the table.
A decline in international LPG prices by 25 per cent during the first half of 2023, and the substantial grant of Rs 22,000 crores from the government had left refiners in a better position, said Hetal Gandhi, director, research, at ratings agency Crisil.
But the latest reduction in rates must be absorbed by the refiners only, analysts added.
