Our demand for one crude, one price continues: IOC Chairman
Business Line, Delhi 05-May-2020
The fallout of the Covid-19 pandemic and the current geo-political situation have led to a major shift in how the oil market works. Till yesterday, it was the oil producers who called the shots in the market, but today, it is equally driven by the consumer demand.
Talking to BusinessLine, Sanjiv Singh, Chairman, Indian Oil Corporation Ltd (IndianOil), said: "The oil trade is a finely balanced one; today, this balance is largely controlled by demand. It is not the first time that we witness a substantial fall in crude price and production cuts. But this time, along with all these factors, there has been demand destruction for different reasons. India has always been an advocate of responsible price and still maintains the same view, though the same would be at different value today than before."
Asked if the domestic refiners have taken advantage of this low price and whether the argument of inventory loss still holds true, Singh said: "We are definitely trying to take advantage of low oil price by procuring some more crude these days. In terms of days coverage, our inventories today provide much higher coverage. The crude purchased under term contracts is also at the prevailing price, thus taking advantage of the current low price phase. Today, the bigger challenge is very poor or negative cracks of all the major products. It means the prices of products being lower than crude, which, in my opinion, is not sustainable. This should get corrected with demand picking up."
So are the refiners getting crude at a cheap price? "Brent and Dubai prices are commonly used markers in the trade. Buyers pay premium or discount over these. For many crudes, the situation in recent months has changed from premium to discount, which is favourable for an importing country like ours."
Today, considering various factors including quality, price and freight, crude from the Arab-Gulf region is attractive. On the debate regarding term contract versus spot buys of crude oil, he said: "The challenge for the term contract is to continue with supplies when the refineries are operating at nearly half the capacity. For procuring more than matching quantity of crude, the working capital requirement also increases. The Asian premium, which was significant earlier, still seems to be there, though it is much lower now than what it was earlier."
"Our demand for one crude one price continues," he said. The Asian countries usually pay a premium mainly because of limited alternatives in terms of sources. But today, due to a crude-surplus kind of scenario, the situation has changed.
Different approach
The argument remains that benefits of low global prices have not been passed on to the consumers at the retail end. "Though the market is deregulated and pricing is free, we had been following the global product prices. This concept works well when things are stable. But it needs a different approach in a volatile market, particularly when the cracks are abnormally low or negative."
On the refinery front, the Indian public sector refiners are going to face, for the first time, a situation of surplus , as the demand has been low, he said.
Sharing some of the numbers he said, last year, the overall growth for petroleum products was 0.2 per cent and if one takes the April 2019-February 2020 period, it was about 2 per cent. The growth in 2018-19 was close to 4.5 per cent.
For April 2019-February 2020 LPG sales grew at 6.4 per cent, motor spirit about 8.2 per cent, ATF 2.5 per cent (in March, it was -5.6 per cent), and diesel 1.1 per cent (but it closed the year in the negative). So, overall, it was a positive year despite the crisis in March.
Rise in demand
In April, public sector oil marketing companies operated refineries in the 85-90 per cent range during the initial days. Since the partial opening of business from April 21, there was a very marginal increase in demand in the initial few days. But in the past few days, higher fuel sales were observed, especially on highways, Singh said, adding "Once things normalise, then motor spirit demand is expected to see faster recovery. Diesel, too, is picking up volumes, though slowly."
