India’s oil refiners are feeling the squeeze from the Gulf war

Indian refiners have long benefited from geopolitical flexibility. While much of the world shunned Russia’s oil after it invaded Ukraine, Reliance Industries, an Indian conglomerate, picked up barrels of it at a deep discount, as did Nayara Energy, part-owned by Russia’s Rosneft, and state-owned Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum. Now, with the Strait of Hormuz, a bottleneck between the Persian Gulf and the Gulf of Oman, all but closed, geopolitics has bitten back. The force that propelled profit for four years has turned into a drag.

The Gulf war has squeezed an important source of crude oil. Before, India got around 2.5m barrels a day, roughly half its imports, from the Middle East, chiefly Iraq, Saudi Arabia and the United Arab Emirates (see chart 1). That amount has fallen by half. Iran has let a few Indian-flagged ships carrying liquefied petroleum gas through the strait, but millions of barrels of oil remain trapped on the Gulf side rather than heading for India’s west coast.

To replace them, Indian refiners have turned once again to Russia. They had been winding down purchases since Donald Trump used these as a rationale to slap additional tariffs on India last August. Sanctions by the European Union similarly dissuaded Indian refiners hoping to keep selling to the EU. Russia’s share of India’s oil imports fell from around 44% at its peak to 25% by February. Now it is rising again. A waiver from Mr Trump on sanctions for Russian barrels already at sea allowed the industry to take those as well. Since the conflict began India has bought an additional 30m barrels or so from Russia, equivalent to about two and a half weeks of the missing Gulf supply.

Refiners also have other ways to adapt. Many of them can switch to processing low-quality, high-sulphur oil instead of the Gulf’s lighter grades. In February Reliance secured a licence from America to receive oil from Venezuela, as have other Indian refiners. (The company has denied reports that it has bought Iranian oil.) Still, India has managed to replace less than two-thirds of the supply from the Middle East, leaving a shortfall of around 700,000 barrels a day, according to Kpler, a ship tracker. To close the gap, oil wallahs are dipping into commercial reserves.

That will keep Indians’ tanks topped up for now. But refiners’ margins are under pressure, and (Reliance apart) their share prices have tumbled (see chart 2). Probal Sen of ICICI Securities, a broker, estimates that for each month the disruption goes on the industry’s earnings will fall at an annualised rate of 12-15%. India now faces increased competition for Russian oil, which it no longer procures at a discount, but a premium of $10-15 over Brent, the global benchmark. China is buying more, and other Asian countries, including Japan and South Korea, are considering doing so. India’s state-owned oil-sellers are squeezed on the retail side too. The Indian government froze local fuel prices in 2022, which gave refiners (and the state) a windfall when crude costs fell. It has kept prices fixed even as oil gets dearer to source.

Exports will not provide much relief. Diesel “cracks”, the premium that refined fuel commands over raw crude, have surged from around $10 a barrel pre-war to $60-odd. A lot of the refiners’ competition for products such as diesel and jet fuel is behind the blocked strait. Yet the Indian government is unlikely to allow the industry to send fuel abroad at a time of scarcity. On March 27th it announced an extra tax on exports of diesel and jet fuel while cutting taxes on domestic fuel consumption. India’s refiners, like the tankers on which they rely, are simply stuck. ■