Oil-importing public sector undertakings (PSUs) have considerably cut import of Brent crude, due to rising price differentials between crude-based products from Dubai and Brent crude-based products, primarily referred to as West African crude.
Officials said West African crude products sourced from Nigerian fields were benchmarked to Brent. “Political uncertainty in the region has not only resulted in higher prices, but the differential between prices of crude sourced from Dubai and Brent Crude is also widening,” said an official. As a result, many companies are not purchasing Brent-based products, and, instead, opting for Dubai-based products.
While spot Dubai crude is averaging around $100-105 a barrel after peaking to $110 a barrel in mid-July, Brent prices peaked to $111 a barrel in July- end and are still ruling around the same level.
An indication of the uncertainty in supply of Brent-related products is reflected in the one-month forward rates for Brent crude that stand at around $109 a barrel, while the six-month forward is higher at $117.37 a barrel. On the other hand, Dubai crude prices for the one-month forward swaps are at $104.72 a barrel and $109.06 a barrel for six months.
“This explains the widening differential between the two varieties. Brent and Dubai crude always maintain a differential in prices, the former being higher than the latter due to sulphur content. However, the differential has been ruling at around six-week high due to healthy margins for gasoline and middle distillates,” explained an oil analyst.
He said the Brent crude-Dubai differential is consolidating around $5-6 a barrel, against $1-3 a barrel in 2009-10. This is primarily due to supply concerns from Nigerian fields, due to geopolitical unrest in West African countries.
“In India, most PSU refineries are designed to process a mix of Brent and Dubai crude, that is a mix of low sulphur or sweet crude and high sulphur-based heavy crude, respectively. Therefore, even if the price is low and supply is high in the case of Dubai crude, one cannot depend entirely on it. Only a few private refiners have the sophisticated technology in the refineries to process entirely either light crude (Brent) or heavy crude (Dubai crude variety),” said an official of a major PSU oil refiner, on the condition of anonymity.
Another PSU official said depending on the design of refineries, oil companies work out a mix of crude imports – Dubai-based products and Brent-based products – at the beginning of a financial year. “Since the outlook for Brent production is sketchy due to the ongoing political problems, and prices are higher, much of the requirement is hedged right at the beginning of the year. The ongoing spot purchases are only for Dubai crude, while spot purchases for Brent have almost stopped.”
Officials added that since Brent is hedged, the foreign exchange risk arising out of the adverse movement in crude price movements is also hedged accordingly. Brent crude is preferred as it contains low sulphur content, ideal for production of various petroproducts and petrochemicals. However, due to the unrest in West African countries, Dubai crude production is almost 40-50 per cent higher than Brent crude products.
