Indian refineries have adopted a diversified crude procurement strategy as the West Asian crisis forces them to look for alternative sources. Saurav Anand explains why the Indian crude basket is a crucial reference as policymakers and companies track crude costs, inflation risks and the impact of geopolitical disruptions
l What is the Indian crude basket?
THE EASIEST WAY to understand the Indian Crude Basket (ICB) is as India’s crude-price index. Crude oil is not one uniform product. Some grades are lighter and contain less sulphur, called sweet crude. Others contain more sulphur and are called sour crude. Instead of tracking every cargo separately, the ICB combines two broad international price references. Dated Brent represents the sweet-crude component, while the average of Dubai and Oman represents the sour-crude component. Their prices are multiplied by their respective weights and combined to arrive at one basket price. Thus the ICB indicates whether India’s overall crude oil cost is rising or falling.
l Why does the basket’s mix shift?
THIS HAPPENS BECAUSE Indian refiners do not buy the same crude mix every month. Purchasing decisions change according to price, availability, crude quality, freight costs, geopolitical risks and security of supply. As the mix of sweet and sour crude imported by refiners changes, the basket weights also change. A higher sweet-crude weight means India imported more sweet crude in the relevant preceding period, and hence Brent-linked pricing has a bigger influence on the basket that month. The ratio moved from 61.02:38.98 in April to 70:30 in May, 71.02:28.98 in June and 79.40:20.60 in July. It changed to 74.94:25.06 in August and 77.81:22.19 in September, in Brent-linked sweet versus Dubai/ Oman-linked sour terms.
l What does a higher Brent weight mean?
THE BASKET WEIGHTS are not simply a map of where India gets its crude from. They represent the type of crude being imported and the benchmark used to represent its price.
A barrel imported from Russia, Africa or another region can be priced in relation to Brent. Many Middle Eastern sour grades, meanwhile, are more closely linked to Dubai or Oman.
So, a 77.81% Brent-linked component does not mean 77.81% of India’s crude comes from Europe or the North Sea. It means sweet crude has a larger share in the basket, making Brent-linked pricing more influential.
l Do refiners buy at the ICB rate?
NO. THIS IS an important distinction.
The ICB is a benchmark, not the actual invoice paid by every refinery. Indian refiners buy individual crude grades through long-term contracts or spot purchases. A particular cargo may trade at a discount or premium to its benchmark.
Suppose the ICB is $95 a barrel. One refinery may secure a crude grade at a $5 discount, taking its purchase price to around $90. Another may buy a grade at a $3 premium, taking the price to around $98.
Then come freight and insurance. If transporting the $90 barrel to India costs another $8, its delivered cost becomes around $98. If the second barrel costs $98 and shipping and insurance add $10, its landed cost could reach $108. So, the same ICB can coexist with very different procurement costs across refiners.
l What changes during a West Asia crisis?
A WEST ASIA crisis impacts much more than the headline crude price.
Oil prices can rise because markets fear disruption to supplies. Certain crude grades may become scarce and attract higher premiums. Tanker freight may increase, war-risk insurance can become expensive, and ships can face delays around critical routes such as the Strait of Hormuz.
Indian refiners then adjust their procurement. They may reduce purchases from one region, increase supplies from another, or switch between sweet and sour grades.
Refiners continuously balance price, suitability of crude for their refinery and security of supply. These sourcing changes can alter the composition of the Indian crude basket and determine whether Brent or Dubai/Oman has greater influence on its movement.
l Why does the ICB matter for the economy?
THE ICB GIVES policymakers an early indication of how much oil-price pressure the economy could face.
If the basket stays high for a prolonged period, India may need to spend more dollars importing crude. That can increase the oil import bill, widen the trade deficit, increase demand for dollars and put pressure on the rupee. Higher crude costs can also travel through transport, aviation, freight, chemicals and plastics and eventually add to inflation.
But a higher ICB does not mean petrol and diesel prices will automatically rise the next morning. Retail fuel prices also depend on international product prices or crack spreads, taxes, margins, exchange rates and pricing decisions.
A crack spread is the difference between the price of crude and the price of refined products such as petrol or diesel. For example, if crude rises by $5 but diesel prices rise by $10, refiners may still earn healthy margins. But if crude rises sharply while product prices do not, margins can come under pressure.
The refinery’s procurement cost is the actual bill, determined by which crude it bought, at what discount or premium, and how much it cost to bring that barrel to India.