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Indian Crude: When the Chips are Down

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Indian Crude: When the Chips are Down

Indian refiners have experienced some of the greatest whiplashes in demand (foreign and domestic) and refinery runs in the world due to Covid-19. Both the collapse in 2Q and now the late-year rebound have been intense. This naturally raises the question: when the refiners must decide what crude supplies to cut or keep, what do they choose?

It must first be understood that there is a large divide in the Indian refining sector between state companies such as IOC and the private behemoths of Nayara Energy and Reliance. Nayara and Reliance primarily export products but do also supply domestically, while the state refiners primarily supply the domestic market and export some excess products, particularly during monsoon season. The differing ownership structure and product outlets also mean that the state companies are incentivized to prioritize stable supply as their top goal, while the private companies are driven by purer economic incentives based on waterborne product market pricing.

On an aggregate national basis, crude imports saw the first Covid-driven drop in April as domestic demand collapsed due to lockdowns. They continued trending down through June. October finally saw a large rebound as domestic demand for gasoline and diesel reportedly returned to year-on-year growth.

Month-on-month changes in Indian crude imports

The Middle Eastern Gulf countries dominate the changes but are not alone. They accounted for 64% of the 2Q-1Q declines, and 87% of the October recovery versus 2Q. On the initial way down, Venezuela was also a major factor as its exports were facing problems of their own and flows of Merey dried up. While the country has slightly recovered, its flows to India came back at only about half of what they had been previously.

The grades are heavily weighted in favour of medium to heavy barrels, especially from the Middle East and Latin America. The top 10 grades typically make up between 50-60% of the total, with 8 of the top 10 being Middle Eastern Gulf producers.

However, the aggregate numbers hide very different state and private behaviours. The sharp swings were readily apparent in the state refineries’ crude import patterns. The private refiners, however, saw a slower and steadier drop of smaller magnitude from April to July and have not seen as large a rebound in October.

Indian crude oil imports by sector (private vs. public)

The reason for the different behaviours goes back to their incentives. State refiners saw the physical needs of the domestic market dry up and had to quickly match with run and import cuts. As most of their waterborne crude imports in 1Q were short-haul (14 days or less from load to arrival), they were able to immediately cut those barrels by over half in 2Q to prevent their storage from being overloaded. As demand has returned, they have been able to ramp those imports back up quickly as well.

Private refiners were not faced with as deep a loss of product offtakers nor a total collapse in export margins. The prior surge in OPEC exports provided them with cheap feedstock for a time that kept their margins positive while others collapsed. As Indian product demand fell apart, their superior efficiencies made them highly competitive for the surviving demand in Asia. While there was a limit to what the waterborne market could take, it was not as drastic either immediately or over time. On the flip side, as Asia has recovered, the loss of cheap excess OPEC crude and a glut of stored product that has to clear across the region has meant that they have not been able to bounce back as strongly either.

Private refiners did not cut back much on their short-haul (14 day or less transit, mostly Middle Eastern OPEC) imports, so medium- to long-haul were the main decliners for them. The bulk of those losses came from the Americas. Russia was the only significant decliner outside of the Americas. Venezuela was an outlier of sorts, with its own exports already falling apart roughly in line with Covid timing. Mexico, Russia, and other countries though were straightforward reductions on a combination of economics and reduced need.

Private refineries crude oil imports June vs Q1

Ultimately the choice of which barrels to cut and bring back during Covid fell into two main buckets. First, forced reductions from state mandates on both the supply (OPEC cuts and Venezuela collapse) and demand (state refiner loss of consumption) sides. Second, private refiner economic incentives on different grades whether positive in the form of cheap crude or negative in the form of long-haul economics that didn’t pay the longer the demand collapse lasted.