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Surging Oil Prices at $100 per Barrel Pose Challenges for State-Owned Refiners in an Election Year.

The sharp increase in oil prices to $100 per barrel presents a dilemma for public sector undertaking (PSU) refiners, as they may find themselves compelled to keep diesel and petrol prices unchanged during an election year. This situation could lead to substantial under-recoveries, potentially reaching thousands of crores.

According to industry estimates, state-owned oil companies are already operating at a loss of Rs 5 per litre for diesel and only a marginal profit of Rs 1 per litre for petrol, even as Brent crude oil prices recently reached $92.42 per barrel after briefly touching nearly $98. In September, the Indian basket of crude averaged $93.4 per barrel, comprising a blend of sour grade (Oman & Dubai average) and sweet grade (Brent dated) crude processed in Indian refineries in a 75:25 ratio.

It’s important to note that the crude basket doesn’t fully reflect the prices at which PSU oil marketing companies (OMCs) purchase crude, as it doesn’t account for discounts on Russian crude.

Brent crude has surged by nearly 25 percent since mid-June due to various factors, including production cuts by major oil-producing nations, improved macroeconomic conditions, and reduced inflation in major oil-consuming countries like the United States.

Back in February, Finance Minister Nirmala Sitharaman criticized the Congress-led UPA government for indiscriminately issuing oil bonds, stating that the government had already paid Rs. 2.34 lakh crore, inclusive of interest, and had Rs. 1.07 lakh crore remaining to be paid, with the final payment scheduled for 2025-26. Sitharaman’s remarks underscore the current BJP government’s aversion to oil bonds.

Given this context, the question arises: how does the central government plan to compensate state-owned oil refiners with oil prices soaring above $100 per barrel? The answer largely hinges on Russian oil imports.

India has been benefiting from discounted Russian crude oil supplies from Moscow. Refiners can procure Russian crude at a price within the G-7 price cap of $60 per barrel without incurring sanctions.

In September, Russia and Iraq accounted for approximately 43 percent and 22 percent of India’s oil imports, respectively. In August, these figures stood at 35.4 percent for Russia and 19.5 percent for Iraq, as reported by data analytics firm Kpler. Russia has emerged as India’s largest crude supplier, redirecting its supplies to the Asian market in response to Western sanctions.

“Indian refiners, the primary beneficiaries of cost-effective Russian crude, should still be able to maintain gross refining margins (GRMs) of around $9-10 per barrel in FY23-24. This is because the expected decline in margins from processing Brent crude is anticipated to be balanced by significant margin expansion from processing Russian crude,” stated CareEdge Ratings.

State-owned OMCs managed to turn profitable in recent quarters after experiencing substantial losses in the first half of 2022-23 due to surging crude prices.

While the government might consider reducing excise duties to provide some relief in an election year and gain favor, it remains unclear how oil marketing firms will be compensated for the ongoing challenges.

Crude Oil Blend from India

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