India’s state-run refiners have decided to reduce their crude oil imports and use more of their inventories in a bid to curb the rising foreign exchange outflows. Indian Oil Corporation (IOC) chairman Sanjiv Singh told PTI on Monday that state refiners are looking at optimising crude oil inventory levels, “without in any way affecting fuel supplies in the domestic market”.
Also, Reuters quoted R Ramachandran, director, refineries at Bharat Petroleum Corporation (BPCL) as saying, “We are looking at various options to contain the costs including reducing our inventory. This will be a coordinated effort among refiners. If need be, we’ll talk to other countries for a coordinated effort.”
The move by the refiners comes amid the relentless rise in global crude oil prices and a falling rupee inflating domestic fuel prices to all-time highs. Brent, the benchmark for half of the world’s oil, climbed to $80 per barrel from $71 in the last five weeks, and the Indian rupee lost ground against the dollar by 5-6% during the same period, resulting in expensive crude imports.
While reduced imports per se would not lead to a softening of domestic fuel prices (the local prices are determined according to a formula that integrates export and import prices of the products), it would curb dollar and other foreign currency outflows at a time India is experiencing net portfolio outflows and pressure on the current account deficit. Also, reduced demand from India, the world’s third-biggest importer of crude, could have a sobering effect on global prices.
However, the strategy entails the risk that in case prices keep increasing, refiners will have to buy crude at even higher prices later once the current inventories are used up, analysts said.
With petrol and diesel prices scaling record highs in the Indian market, S&P Global Ratings on Monday said, “We don’t expect any reversion to the subsidy mechanism similar to before 2014 in India, even though the incumbent government may opt to control retail fuel prices, using other means, to cushion the inflationary shocks.”
Singh said the high oil prices would in the long term impact demand and so reducing imports makes sense. While demand for auto fuels is considered to be price inelastic, the demand during the period April-August 2018 grew just 4.9% annually compared with 7.47% in 2017-18.
For April-August this fiscal, the country spent $48.9 billion on importing 94.9 million tonnes (mt) of crude compared with $31 billion on imports of $89.1 mt in the same period last year. India imports almost 80% of its crude oil requirement.
Apart from state-run oil marketing firms IOC, BPCL and Hindustan Petroleum Corporation, Indian refiners include Reliance Industries, Nayara Energy and state-owned Mangalore Refinery and Petrochemicals.
India in 2013 also relied on the strategy to use its inventory as crude oil prices crossed $100 a barrel and the rupee weakened to 68 per US dollar.
In 2017-18, India imported around 220 mt of crude. The top source for oil marketing companies was Iraq (29.6 mt), followed by Saudi Arabia (19.4 mt), Kuwait (11.4 mt), UAE (10 mt) and Iran (9.8 mt).