India's oil import bill stood at $11.83 billion in August, as per oil ministry data. That's a 15% jump month-on-month and nearly 52% higher than the oil bill in August 2017. With Brent beginning to boil again while the rupee continues to fall against the dollar, the outlook on oil is far from optimistic for the country, which imports over 80% of its oil needs. In fact, India is the world's third-biggest oil importer.
So Indian refinery officials reportedly met in Mumbai to brainstorm options for dealing with the situation on September 15. "One of the immediate steps that the refiners are considering is to reduce crude purchases for a short time and reduce our inventory," a source who attended the meeting told Reuters.
Earlier today Brent crude hit $80.47 per barrel, its highest peak since May, and an uptick of around 30% from its low for the year on February 13. However, in rupee terms, the oil price has gained 46% since then as the Indian currency has been steadily depreciating and Indian refiners pay for their crude in dollars.
The refinery officials' plan to cut imports illustrates that rising crude prices and emerging market currency weakness may start causing oil demand to decline in a number of markets that have so far seen healthy crude consumption.
"State refiners normally maintain up to a month-long inventory which include crude in the storage, pipeline and in transit to India. Reducing inventory will help reducing the costly imports and, thereby, reduce the demand for dollars," R.K. Singh, a former chairman of Bharat Petroleum Corp (BPCL), told the agency. He explained that the entire process of reducing the inventory has to be done in a coordinated manner among the refiners to ensure that there are adequate supplies of the product in the market to meet the local demand.
While using up crude inventories could save Indian refiners short-term import costs, the inherent risk is that if prices do not ease subsequently, the companies will end up with a fatter oil bill in the future. Despite this risk, the sources said that the Indian government supports the plan.
After all, state refiners have opted for this strategy in the past, too. According to Singh, in 2013, BPCL had halved its crude inventories to an average of 15 days of supply for its operations, when the rupee declined to below 68 to the dollar and oil prices were over $100 per barrel.
Worryingly, oil prices seem to be headed there. Commodity traders Trafigura and Mercuria recently said that the international crude oil benchmark could rise to $90 per barrel by Christmas and pass $100 early next year amid tightening global supplies.
On the one hand, US sanctions against Iran, the third-largest producer in OPEC, are scheduled to kick off in November. According to JP Morgan, the sanctions on Iran could lead to a knock out of 1.5 million bpd from the market. On the other, unplanned disruptions from Venezuela, Libya and Nigeria have further tightened the market, just as global demand approaches 100 million bpd for the first time. The US financial institution added that it expects Brent to average $85 per barrel over the next six months.
Although the Organization of the Petroleum Exporting Countries (OPEC) as well as top producer Russia are discussing raising output to counter falling supply from Iran, no decision has been made public yet. So the domestic refineries will have to take a call on their plan to reduce oil purchases sooner rather than later.
With Reuters inputs