Indian Oil Corporation purchases 30% of its crude from spot market, up 10% from last year
New Delhi   19-Oct-2015

Indian Oil Corporation, the nation's largest refiner and fuel retailer, now purchases 30% of its crude requirements in the spot market, compared to 20% last year, helping it lower procurement cost and gain flexibility in responding to the consumer demand.

IOC's move is part of the larger shift among refiners towards the spot market as longterm price contracts put them at a disadvantage in a sharply falling crude oil environment.

In 2014-15, most refiners were saddled with huge inventory losses due to falling prices that hurt their profits. The volatility in crude prices, which have halved in a year, is a headache for refiners, which aim to counter this by enhanced spot purchases. "It (spot purchases) is saving us money," A K Sharma, director ( finance), said. "This also gives us flexibility in terms of the types of crude we want to purchase, depending on the demand of the products. Otherwise, you have to buy and process and sell the kind of things there is no demand for."

Sharma said the company now has enhanced flexibility on which crude to buy and when depending on the intensity of the demand for products like diesel, petrol, naphtha and LPG as some variety of crude oil are more suited to produce certain kinds of products in higher quantity. So now, IOCBSE 0.77 % is able to better respond to the consumer demand and is less caught in situations when it would produce something more because of the supply of the crude and less because of the demand. The purchase term agreements for refiners usually last a year with prices fixed every month on the basis of a formula dependent on the average prices in the international market topped by a premium.

In the past one year, when prices have been sharply falling, the term prices naturally were higher, becoming a disadvantage for refiners.

A fall in crude oil prices has also meant that the cost of fuel to run refineries, a significant cost, has also come down sharply, leading to higher margin for refiners.

Interestingly, a supply glut and a slowing demand that crushed crude oil prices hasn't quite impacted exactly in the same way the final products such as petrol and diesel since no such glut has been experienced in the global refining capacity.