India’s public sector oil companies are likely to face pressure on their margins in the wake of the United States’ decision not to extend sanction waivers to any country, including India, on oil imports from Iran. With analysts expecting an increase in crude oil prices once Iranian supply gets cut off and possible constraints in increasing retail fuel prices due to the ongoing election season, Indian oil PSUs are set to take a hit to their profitability.
For starters, India was one of the eight countries that had received a six-month waiver from the US sanctions on oil imports from Iran. With the six-month period set to end on May 2, 2019, the US on Monday ended speculation on whether waiver extensions were in the offing by declaring that it will end all Iran-sanction waivers once the deadline runs out. This decision comes at a time when the price of the Indian crude basket - an average of the Dubai, Oman and Brent crude benchmarks - has been rising, and the country is in the middle of Lok Sabha elections.
On Tuesday, brent crude touched a near six-month high of $74.46 a barrel. This means that refiners will not only have to scramble to find replacements for Iranian crude, but will also need to deal with the resulting volatility in international crude prices, which will in turn directly influence domestic cooking gas and auto fuel prices.
While the Indian government has said that a robust plan is already in place to ensure there is adequate supply of crude to oil refineries from May, the discontinuation of crude oil imports from Iran may have economic consequences for refiners. The big concern is that other crude oil suppliers — like Saudi Arabia, Kuwait, Iraq, Nigeria and the US — do not offer as attractive price options as Iran, which includes a 60-day credit line, and free insurance and shipping.
“The domestic refineries benefit from the higher credit period of 60 days offered on Iranian oil compared to 30-day credit period typically offered by other suppliers,” pointed out Abhishek Dafria, vice-president and co-head at ICRA. The discontinuation of Iranian oil imports might negatively affect the annual operating profits of these refiners by over `2,500 crore, he added.
Officials at oil companies, too, agree that Iranian crude was about 50-60 cents cheaper than available alternatives and the challenge now is to secure other suppliers at competitive terms in an already tightening global market. In FY19, excluding March, India imported 24 million tonne (MT) of crude from Iran, making the West Asian nation our third-largest supplier of crude oil during the period under review.
Analysts at Kotak also expect global oil markets to tighten further in the near term due to the full curtailment of Iran’s oil exports and the possibility of disruptions in crude supplies from Libya given escalating unrest in the country. Global oil markets have also been tightening in recent months due to a voluntary reduction in supplies by the OPEC+ cartel and Canada, combined with restraints on Venezuelan crude exports.
The tightening of sanctions by the US has also lead to anxiety in the stock markets. “We believe it is safer to avoid downstream PSUs (BPCL, HPCL and IOCL) in the near term, as current valuations ignore potential risks from any spike in crude that may put pressure on refining as well as marketing margins and bleak refining outlook,” Kotak Institutional Equities said. However, it reiterated its buy call on GAIL and ONGC, both being beneficiaries of elevated crude prices, which Kotak said could act as good hedge against any spike in crude oil prices. “We note that ONGC stock is pessimistically discounting net crude realization around $45 per barrel,” it said
Iran among top suppliers of crude to India in FY19
Data shows that the first eleven months of fiscal year 2018-19 saw Iran’s share in India’s crude oil imports at 9 per cent.
Tightening global markets a concern
Over the past few months, global oil supply has been tightening due to disruptions in crude supplies from Libya, a voluntary reduction in supplies by the OPEC+ cartel and Canada, combined with restraints on Venezuelan exports