Suez crisis: Houthi attacks disrupt India's diesel trade and oil business

Sonangol Huila, a very large crude carrier (VLCC), left Jamnagar carrying 1 million barrels of diesel on July 8 and reached Le Havre, a French port, on August 18; Elandra Falcon, carrying 1 million barrels of ultra-low sulphur diesel, left Jamnagar in June and reached Vesta Antwerp on August 10.

One could dismiss these trips as one of those typical journeys happening over the years, with vessels ferrying fuels from Reliance Industries’ Jamnagar refinery to consumers in Europe. Such trips, led by Reliance, helped India earn $57.3 billion in FY23 and $47.7 billion in FY24 from overseas fuel sales, as much as 13 per cent of India’s gross exports, according to oil ministry data.

But some of 2024's trips were unusual. Diesel was carried on older crude carriers, typically used to ship dirty crude oil, rather than on clean product tankers — after scrubbing them clean at a cost of $1.5 million per vessel to transport fuels, ostensibly to save on transportation costs, industry sources said. Shippers have had to pay over twice as much in freight in 2024 from last year to hire dedicated product tankers to transport gasoline, jet fuel and diesel, after the Iran-backed Houthi rebels escalated attacks on western oil tankers from last December. Ships take a much longer route around Africa’s Cape of Good Hope to reach customers in the US and Europe compared to a shorter Suez Canal crossing.

“The persistent attacks by Houthi militias on cargo ships in this region have rendered the critical shipping route connecting Asia with Europe via the Suez Canal unsafe. As a result, many freighters opt for the longer route around Africa's southern tip,” said Darshan Ghodawat, CEO, AVA Global Logistics. But the alternative via the Cape of Good Hope not only increases shipment costs and delivery times but also adds to the strain on global trade, which is already burdened by the pandemic, the Russia-Ukraine conflict, and a broader economic slowdown, he added.

India’s fuel export business is already feeling the heat, with diesel exports, a middle distillate, in the second and third quarter hitting the bottom of their five-year range driven by lower gasoil yields and strong domestic demand, said James Noel-Beswick, an expert on distillate markets, from Geneva-based Sparta Commodities.

Houthi missile strikes on tankers have threatened the competitiveness of Indian fuel exports, prompting out-of-the box solutions like hiring VLCCs to transport fuels — lending scale and lower costs, which compensate for the longer journeys and costs incurred on cleaning these large crude carriers. Longer routes around Africa to avoid Houthi attacks in the Red Sea also mean Suez Canal draught restrictions no longer matter, which prevented fully loaded VLCCs from crossing the canal, industry officials said.

The cost of cleaning a VLCC is around $1.5 million, plus the lost revenue from the 20-25 days that it takes, but potential freight savings are huge, US market intelligence publication Energy Intelligence (EIG) reported. It costs less than $27 per tonne to ship diesel on a VLCC, versus $49/tonne on a coated LR1 product tanker, EIG said, citing shipbroker SSY.

Falling exports

The Houthi attacks, which continue to date with no end in sight, have also targeted tankers carrying Indian products — in retaliation to Israel’s bombing of Gaza and New Delhi’s support for Israel, industry officials said. The Suez Canal was a critical route for about 65 per cent of India's crude oil imports in FY23, valued at $105 billion, and its closure has inevitably led to higher charter rates as ships are forced to take the longer route, Ghodawat said.

Diesel/gasoil exports in August at 520,000 barrels per day (bpd) declined by 20 per cent from last December’s 650,000 bpd — when the Houthi attacks escalated — and by 14 per cent from 606,000 bpd a year earlier. Gasoil and diesel are similar but the nomenclature varies across countries. Regulations can also alter uses but from a refining standpoint, gasoil is blended with other components to tailor diesel for a region's needs, in terms of say flashpoint — the lowest liquid temperature at which it gives off vapours to form an ignitable vapour/air mixture — or pour point.

Exports of clean products in 2024, including gasoline, diesel, naphtha, and jet fuel, were flat at around 1.2 million bpd but diesel/gasoil, which account for 47 per cent of fuel exports in volume terms, fell by around 5 per cent to 517,000 bpd this year, data from market intelligence agency Kpler shows. Volumes are also down by 130,000 bpd, or 21 per cent, from a 2021 high. Gasoil exports declined by 85 per cent in 2024 as Indian refiners converted more of the gasoil into diesel to meet growing domestic needs.

Gasoil demand is falling (globally), especially with tightening specs leading to lower exports, said Singapore-based Serena Huang, head of Asia-Pacific market analysis for market intelligence agency Vortexa.

Suez syndrome

The Suez crisis is mainly responsible for the decline in diesel exports, industry officials said, alongside lower profits from processing crude to diesel and increasing domestic use of the fuel. For instance, the US is taking away India's market share in diesel in Europe, a key export destination, because of its proximity to the continent whereas Reliance has to send its cargoes around Africa at a higher cost.

There were periods of time when the export parity price of diesel was more advantageous than the import parity plus the loss we were making in the retail market. So, in those times, when they were having an opportunity to process higher quantities of crude or maximize diesel, they found it worthwhile to do it, said R Ramachandran, oil industry consultant and former refining head of Bharat Petroleum. “'In the current context, Reliance might have realised economic sense in domestic sales,” Ramachandran said.

India’s domestic demand has increased while refining capacity has stagnated. Oil consumption may grow by 200,000-280,000 bpd, the biggest contributor to global oil demand, according to international forecasters International Energy Agency and the US Energy Information Administration. But refining capacity has stagnated at around 5 million bpd for the last few years as Indian refiners were left confused over New Delhi’s commitment to replace fossil fuels with clean energy, industry sources said.

Production of diesel increased to 116 million tonnes in FY24 from 107 mn tonnes in FY22, a 9 mn tonnes increase. But comparatively, consumption of the fuel, India’s most consumed oil product, has risen from 77 mn tonnes in FY22 to 89.7 mn tonnes in FY24, a 12.7 mn tonnes increase. Higher consumption and almost flat production have resulted in a decline in exports, said Swarnendu Bhushan, co-head of institutional equities, PL Capital-Prabhudas Lilladher.

Russian crude discounts are much lower in 2024 and secondly, several new refineries have been starting up inWest Asia and Africa, leading to lower exports from India, said Prashant Vasisht, senior vice-president and co-group head, corporate ratings, ICRA, a US Moody’s affiliate. Nigeria has commissioned the 650,000 bpd Dangote refinery, the biggest in Africa, a key market for Indian fuels, while Oman has commissioned Duqm and Kuwait Al Zour among new capacity additions in West Asia.