How India will be impacted by attack on Saudi crude oil processing facilities

By: and |
Updated: Sep 17, 2019 7:10 AM

The petroleum ministry said oil refiners have been informed of sustained crude supplies by Saudi Arabia but added that it was closely monitoring the situation.

Saudi Arabia, Saudi Arabia oil crisis, India, crude production, oil processing, Impact on indiaThe spike in oil prices could exacerbate the government’s fiscal pressures.

The major disruption in Saudi Arabia’s crude production, unless restored quickly, would necessitate Indian refiners to resort to alternative sources to make up for any shortfall in supplies from the West Asian kingdom, where New Delhi nowadays sources a sixth of its imported oil from. The petroleum ministry said oil refiners have been informed of sustained crude supplies by Saudi Arabia but added that it was closely monitoring the situation.

An oil refinery official told FE though Saudi Aramco initially said they would be supplying from inventories, the firm also hinted at “operational requirement of changing grade to make the crude available”. Indian refiners have been trying to restore a loss of crude oil supply from Iran, following the US sanctions on Tehran. While Monday’s spike in oil prices raised concerns, any sustained increase in prices could widen India’s trade deficit.

The spike in oil prices could exacerbate the government’s fiscal pressures and stoke inflation with the impact to be more visible when gauged by the WPI. India met 85% of its oil requirement via imports in April-July this fiscal.

Care Ratings said a dollar increase in prices on a permanent basis will increase India’s crude import bill roughly $1.6 billion/annum. Icra said till Indian crude basket is in the $70-75/barrel range, PSU upstream companies may not have to bear material under-recoveries. Refiners are expected to benefit from short-term inventory gains but their gross refining margins could be affected in the medium-term if crude prices rise rise significantly.

K Ravichandran, senior vice-president, Icra, wrote, “While the oil markets await further updates on the resumption of supplies from Saudi Arabia, the oil markets will nevertheless be nervous as any retaliatory measures by Saudi Arabia and its allies will keep the market on tenterhooks. As a result, oil prices should factor in sizeable geo-political risk premium which will be negative for Indian consumers. Nevertheless, this impact is likely to be short-lived as the market will rebalance swiftly once the tensions abate.”

R Ramachandran, director, refineries at BPCL, told FE , “We will have to wait and watch for any prolongation in supply disruptions to assess any financial impact on the company. However, we also have alternative sources of crude to meet any requirement.”

Somshankar Sinha, equity analyst at Jefferies, said, “For India’s oil marketing companies, any likely increase in West Asian premiums could hurt as well — especially for the lighter grades that would likely get impacted. Every $1 impacts earnings per share for IOCL, BPCL & HPCL by around 20%.”

Kotak Institutional Equities said, “We do not rule out a possibility of moderation in marketing margins on auto fuels— a US$10/barrel rise in global crude and product prices may require oil marketing companies to increase retail price of diesel and gasoline by Rs 5-6/litre in the following fortnight. Sharp jump in the global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss.” After Iraq, Saudi Arabia is the second largest supplier of crude oil to India and had supplied 295.6 million barrels during FY19.

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