Fuel reforms freeing retailers to set petrol prices and lifting prices of other products could push refiners to their home market instead of shipping fuel abroad,buoying Middle East fuel margins.
India,the world’s fourth-biggest importer of crude,last week took advantage of fuel prices hovering around $79 a barrel,or nearly half the 2008 record high,to make a politically unpopular move to increase prices of fuel,including kerosene and cooking gas,to ease its budget deficit.
“There is stiff competition in the international export market for refiners,and Indian refiners will probably be glad to sell into the domestic market,provided the fuel hikes allow them to make a decent margin,” said Victor Shum,an analyst with energy consultancy Purvin & Gertz.
In the short term last week’s unexpectedly bold move to introduce market prices of fuels will exacerbate headline inflation that topped 10 per cent in May,but in the long term moving toward market pricing will ease a subsidy burden as India looks to cut a deficit set to hit 5.5 per cent of GDP this year.
Shares in private sector refiners Reliance Industries and Essar Oil rose 1.1 per cent and 6.45 per cent after the news,while those of state retailers such as HPCL rose by double-digit per centages.
“Reliance and Essar have complex refineries,they can process heavy crude,which is available at cheaper rates. So they stand to gain the most from the decision”,a trade source said.
Freeing up petrol prices will boost profits and strengthen the retail presence of Reliance and Essar,which had almost 15 per cent of the retail fuel market five years ago,before subsidised state firms nearly squeezed them out.
The reform move could also soften product prices in Singapore in the near term,if it prompts Indian state refiners to source fewer products from east Asia.
India’s private refiners,with plants in western India,export products linked to Arab Gulf prices,while state refiners import products with prices based on the Singapore market.
“If private refiners step up supply of products to Indian markets,then the MOPAG (Mean of Platts Arab Gulf) price will get support,” said Praveen Kumar,a senior consultant and the head of the South Asia oil and gas team at FACTS Global energy.
“And state firms could cut down on their purchases from Singapore and eastern markets,which would lift pressure on premiums in an already surplus market,” Kumar added.
Fuel traders agreed that India’s reform push would curb exports by the private refiners.
“Reliance and Essar will now withdraw supplies to public sector units and concentrate on reviving their retail network,” said an oil product trader.
“Despite the entry of private players,the market will still be short and the state-run firms may perhaps be forced to rely on imports and occasionally resort to exports,” the trader said,adding: “Now the competition lines will be clearly drawn.”
Indian states do not have a uniform tax structure,making road transport expensive,while custom duties and freight rates can make coastal movement uneconomical.
“There are logistics constraints,” he said. “So some pockets in the west will be in surplus while some in the east will face deficits,” the trader said.
Market-driven prices may curb fuel use in India — but not by much,as economic growth is on track to reach 8.5 per cent this year. India,along with China,was widely seen as stoking demand that helped drive crude’s rally to $147 a barrel in 2008.
India’s annual fuel sales rose 6.3 per cent in May to 12.38 million tonnes,driven by higher sales of petrol and diesel.
“I don’t think it will significantly impact fuel demand in India. Petrol is mainly used by the emerging middle class,which is immune to fuel prices,” said Eduardo Lopez,senior oil demand analyst at the Paris-based International Energy Agency.
In its June oil market report,IEA estimated Indian fuel demand would rise by 1.9 per cent in 2010.
New Delhi reserved the right to intervene in case of high and volatile global crude oil prices.
Indian private oil retailers Essar Oil and Reliance this month said they planned to boost retail networks if India eased controls on fuel prices.
Reliance owns 1,420 petrol stations but operates fewer than half,as it is difficult to compete with subsidised state operators,and a company official said it needed more information before deciding to reopen retail outlets.
“The devil lies in the detail. We will first see the mechanism and then decide,” he said,declining to be identified because of the sensitivity of the topic.
A person close to Reliance’s operations said the firm can produce about 12 million tonnes of diesel from its 660,000 barrels per day Jamnagar refinery in Gujarat,half of which is sold through state firms in local markets.
In April-May 2006 when Reliance closed its retail stations it was selling about 6 million of tonnes of diesel in Indian markets,but demand has also grown since,so it could easily sell 7 to 8 million tonnes of diesel locally,the source added.