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Russia’s disrupted oil trade crimps margins for Indian refiners

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Oil & Gas 23 Feb 2024 11:55 AM IST Economic Times

India's state-run refiners are facing a shift in fortunes as once-cheap Russian oil becomes more expensive and less accessible, reducing revenues for businesses that had benefited from Moscow's war in Ukraine.

Red Sea attacks have increased freight rates, while US sanctions have left some Russian commodities headed for India stranded, further raising expenses. This may push some processors to purchase more expensive barrels from Middle Eastern sources, reducing profit margins.

India imports 88% of its petroleum needs and took advantage of cheaper Russian oil after the war in Ukraine when others avoided Moscow's barrels. However, there is pressure on the trade, which has helped position the state-owned refiners for a rise in net income this year.

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 benefit from 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 spilt into the global fuel trade. Fuel arrivals from India to Europe averaged just 18,000 barrels a day in the first two weeks of February, a plunge of more than 90% compared with January’s average, according to Vortexa Ltd.

The disruptions will likely impact Reliance and Nayara Energy Ltd., although they still have export options across Asia and Africa. Cheaper Russian oil has made India’s refiners more competitive than their peers in South Korea, Singapore and worldwide. If India loses the Russian advantage on crude oil, whatever marginal refining edge it has will be gone, according to Mukesh Sahdev, the head of oil trading and downstream research at Rystad Energy.