After witnessing a slowdown in the past couple of months, India’s petroleum product exports came in at a five-month high, jumping nearly 41 percent in August 2023 compared to the month before owing to a surge in crude oil prices. But New Delhi may struggle to continue the current run rate on outbound shipments of fuel due to limitations emerging from several areas, ranging from refining capacity, and windfall tax, to diminishing discounts from Russia.
A closer look at the data reveals that despite a sequential uptick, the value of India’s fuel exports fell 23 percent year-on-year in the first five months of the current financial year as crude oil prices declined from the elevated levels of July 2022, data from the government's NIRYAT portal showed.
"Nearly half the decline in exports so far this year has been driven by the decline in petroleum prices. Though export volumes of petroleum products were up 6 percent, prices are 27 percent lower than a year ago," commerce ministry officials had said on September 15.
But a decision by Saudi Arabia and Russia to extend production cuts till the end of 2023 has propelled oil prices higher of late. Brent crude jumped to a 10-month high and breached $94/barrel in mid-September. This was followed by Moscow’s decision to temporarily ban fuel exports, which further exacerbated worries over tight supply, keeping prices elevated.
Therefore, it is not surprising that this recent rise in oil prices is fuelling expectations of better growth in India’s fuel exports in value terms. But, according to a government official, New Delhi does not have enough refining capacity to increase outbound shipments of refined fuel.
“India doesn't not have much storage or refining capacity left, so the rise in crude oil prices would benefit our exports only if we had the capacity to refine. Since we are a major importing nation, we don't have much refinery capacity,” said the official, who spoke on the condition of anonymity.
As of April 2023, India’s refining capacity stands at 253.9 million metric tonne per annum (MMTPA). India processed 109.5 million metric tonne (MMT) of crude from April to August 2023, as against 106.8 MMT in the same period last year, according to official data.
India is the third largest consumer of oil in the world and imports around 85 percent of its requirements from key trading partners. Despite the erosion in discounts from Moscow on crude oil, Russia remained New Delhi’s top supplier in July.
Limitations abound
What makes the trajectory of outbound shipments of refined petroleum crucial is that so far in the current financial year, it is the second-highest exported product from India even as it saw the steepest decline among key items. This at a time when the merchandise trade deficit widened to a 10-month high in August 2023, as a slowdown in the economies of New Delhi’s top trading partners dented demand for Indian goods.
The decline in petroleum exports can also be attributed to concerns around a slump in demand globally, the official cited above added.
Unlike last fiscal, the current volatility in oil prices is on account of a contest between concerns around a supply crunch, and worries over slower demand due to tighter monetary policies in the US and Europe. As central banks look to fight high inflation, indications of monetary policy remaining tight, or of future rate hikes, tends to hit demand for oil.
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The spike in global oil prices is also making it seemingly impossible for India to get cheaper oil from Moscow. A rise in prices leading to a lowering of discounts by Russia is likely disincentivising Indian oil companies from exporting more, since the margins may drop compared to earlier.
This is crucial since India had been purchasing more and more cheap Russian oil and refining it into fuel for Europe and the US, especially since western nations imposed sanctions on Moscow after it invaded Ukraine.
India’s crude oil imports from Russia slipped around 23 percent in August from the previous month, according to information from energy cargo tracker Vortexa. This comes amid reports of Indian oil companies refraining from buying Russian oil as it crossed the $60-per-barrel mark in recent months.
“With Russian oil crossing $60 per barrel, breaching the sanctions threshold, oil companies and banks in India are not keen to buy or negotiate the same,” says Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations.
Yet another disincentive for oil companies, which could dim the prospects for India’s fuel exports going ahead, is the imposition of windfall taxes.
“If exports become more lucrative compared to selling in India, there would be an incentive to export more. This is what happened in May, June, July of 2022, after which the government implemented a windfall tax. A windfall tax generally balances out the advantage you are getting in the export market versus the domestic market, and there isn’t much of an incentive to export,” explained Probal Sen, Research Analyst at ICICI Securities.
The windfall tax, which was first imposed by the Indian government in July 2022, is reviewed fortnightly based on the movement in oil prices. The centre introduced this levy on oil producers when a surge in crude prices, following the Russia-Ukraine war, pushed up profit margins of oil companies.
Rosier outlook
“However, with Russia and Saudi Arabia announcing voluntary production cuts, oil prices have started moving northwards and may help petroleum exports in value terms,” Sahai added.
ICRA’s Energy Analyst Prashant Vasisht too believes that in the coming months, petroleum exports (from India) are expected to remain healthy, majorly due to restriction on diesel exports from Russia and lower production globally due to supply cuts from OPEC+ countries.
“Heavier distillates such as fuel oil and diesel are not being produced in adequate quantities globally, so their demand will remain healthy,” Vasisht added.
With fears of a global slowdown impacting exports, India’s ability to continue as one of the top exporters of fuel, especially to newer markets like the US and Europe, would be a key factor in limiting the country’s widening trade gap.
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