India's oil imports to be disrupted as US-Venezuela tensions escalate

Uncertainty over Venezuelan supplies comes amid reduced discounted Russian flows

Indian imports of cheap Venezuelan oil, the country’s fifth-biggest crude supplier in 2019, may face disruptions from April as the US and the South American country are embroiled in a dispute over renewing a six-month permission for crude exports.

Uncertainty over Venezuelan supplies for Indian refiners comes amid reduced discounted Russian flows also targeted by the US, and the Indian government’s move to slash diesel and petrol prices by Rs 2/litre. Brent crossed $85 per barrel for the first time since November on Thursday.
 

According to analysts, all these factors may hurt the finances of the state-run oil marketing companies.
 

Oil marketing companies (OMC) are projected to achieve a gross marketing margin of Rs 5/litre on petrol and Rs 1/litre on diesel, which after deducting marketing costs of Rs 2/litre works out to a Rs 1/litre loss on diesel sales, Swarnendu Bhushan, co-head of research Prabhudas Lilladher, said, adding that Brent will continue to trade in the $80/bbl range as OPEC manages output.
 

The value of Venezuelan oil for Indian refiners is reflected in the delivered average prices of $61/bbl in January, $26/bbl cheaper than Saudi oil and $18/bbl lower than Russian crude, according to Indian customs data. Estimated discounts to ICE Brent on Venezuelan heavy grades have narrowed to between $5/bbl and $14/bbl versus $20/bbl before sanctions were lifted, the UK-based agency Energy Intelligence reported.
 

Discounts on the Urals are in the $3/bbl range, an Indian refining official said.
 

In recent weeks, Venezuelan President Nicolas Maduro’s government has arrested opposition campaign officials and stifled civil society organisations while preventing opposition leaders from contesting polls. In January this year, the US threatened to reinstate sanctions on Venezuela’s oil sector after the country’s Supreme Court upheld the disqualification of an opposition presidential hopeful. The easing of sanctions, put in place by the previous Trump administration in 2019, came with conditions of conducting free and fair polls. Targeting opposition leaders lends uncertainty to a proposed renewal by Washington.
 

India was an active buyer of Venezuelan crude, which accounted for nearly 12 per cent of the country’s supplies in 2015, before US sanctions were imposed in late 2020. Volumes reached a record 481,000 barrels per day (bpd) in November 2014, with Venezuela becoming India’s fifth biggest crude supplier in 2019 having a 7 per cent share of the Indian market. Delivered rates of Venezuelan oil into India averaged as low as $48/bbl in FY20, the cheapest among all crudes.
 

Supplies of Venezuelan oil reached a high of 185,000 bpd this month until the 15th - higher than average shipments in 2020, according to ship tracking data from Paris-based market intelligence agency Kpler. 
 

Venezuela's heavy, sour Merey crude is mainly shipped to Reliance Industries, which accounted for all of India’s Venezuelan purchases in March, Kpler data show. Indian refiners expected cheap Venezuelan oil to provide an alternative to Russian Urals, two Mumbai-based refining officials said. Merey, a heavy, high sulphur grade sought by Indian refiners, is tough to process but the state-run refiners led by Indian Oil have upgraded their facilities to profitably process such grades.
 

OMCs made a gross marketing margin of Rs 7.8/litre on petrol and Rs 5.3/litre on diesel during the fortnight ended 14th March 2024 (prior to cuts), the brokerage said.
 

But expansion in global refining capacity led by 2.5 million bpd capacity added in China last year will weigh on margins later this year, Bhushan said. 
 

He was more sanguine about near-term refining margins because drone attacks on Russian refineries have eliminated some products from the market.
 

Mumbai-based rating agency ICRA said that OMCs may achieve breakeven on marketing margins on diesel, and petrol will be in positive territory.
 

Prior to the cuts, the marketing margins were healthy for both petrol and diesel and on the refining side they are making very healthy margins, said Prashant Vasisht, senior vice president & co-group head - corporate ratings, ICRA Limited. He said diesel cracks were over $16/bbl and gasoline was around $11/bbl.
 

Availability of Venezuelan crude, with many fields shut down because of the sanctions, has proved a constraint for India as it has to compete with Chinese and US refiners. Venezuela produced around 786,000 b/d in October, Energy Intelligence said, citing OPEC numbers.