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Crude rally amid curbs on Russia to stoke inflation

Oil refineries operated above their declared capacity for the third straight month in January as they sought to make up for earlier production losses due to the pandemic.Premium
Oil refineries operated above their declared capacity for the third straight month in January as they sought to make up for earlier production losses due to the pandemic.

  • Low reliance on Russian oil may help insulate India from impact of EU and US sanctions
  • Russia accounts for 11% of global crude oil exports, but the possible revival of the Iran nuke deal could restore about half of this supply

MUMBAI : India’s low reliance on Russian crude oil imports will help insulate the country from any severe impact of European and US sanctions on Moscow though costlier oil could hit consumption and fuel inflation, oil company executives and industry analysts said.

Indian fuel retailers, recovering from the covid-induced impact on domestic demand, are expected to closely monitor the fast-unfolding geopolitical tensions before deciding on passing on the impact of spiralling global crude prices to consumers.

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“Increasing pump prices amid the current volatility is not prudent and we will wait for 10-15 days. Oil companies have not increased retail fuel prices for around 90 days in view of the elections," Bharat Petroleum Corp. chairman Arun Kumar Singh told ET Now television channel on Wednesday.

According to the latest oil ministry data, oil refineries operated above their declared capacity for the third straight month in January as they sought to make up for earlier production losses due to the pandemic.

However, in a slight reprieve, oil prices fell on Wednesday, retreating from the seven-year high hit on Tuesday as the US government said the first wave of US and European sanctions on Russia was unlikely to disrupt oil supplies. Brent crude was down 0.6% to $96.25 barrel after hitting $99.50 on Tuesday, its highest since September 2014.

“We are hoping there is diplomatic resolution to these geopolitical issues. Though crude has hit its seven-year high on the Russia-Ukraine conflict, we are hoping that lifting of sanctions on Iran could provide some respite by gradually adding 1.3 million barrels of oil per day supply," a senior official from an oil marketing company said, adding that production from the OPEC+ cartel has remained well below targets.

Russia is not among the biggest sources of oil and gas for India, the world’s third-largest oil importer and consumer. However, prevailing high oil prices will keep the CPI (Consumer Price Index) inflation trending higher for longer unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation. Also, since the European Union is the biggest market for India’s exports, supply disruptions to the EU from Russia are likely to generate greater demand for alternative steel and engineering goods supplying destinations such as India.

“India, despite its long-standing defence-import dependence on Russia, accounts for a negligible (less than 1%) share of Russia’s crude oil exports, partly because most Indian refineries cannot process the heavy crudes that Russia exports—as well as the transportation costs from Russia to India (in the absence of pipelines connecting the two countries)," said ICICI Securities in a report.

Though Russia accounts for 11% of global crude oil exports, the possible revival of the Iran nuclear deal, now at a crucial stage of negotiations, could restore about half of this supply, adding about 1.5mmbd (million barrels per day) of production and exports within a few months.

“If sanctions take about 60% of this off global markets (with China, Belarus, and a few other customers possibly defying the sanctions), world crude-oil supply would decline by 3mmbd, and the Brent crude price would likely shoot above $110/bbl. However, even with the possible restoration of Iran as a major crude oil exporter, Brent would likely remain above $100/bbl for much of 2022," added ICICI Securities.

On the gas front, state-run GAIL (India) Ltd has a long-term liquefied natural gas (LNG) deal with Russia’s Gazprom, wherein it has been importing around 2.5 million tonnes (mt) of LNG per year from 2018. Indian companies are also negotiating with Russia’s largest LNG producer Novatek for a long-term supply deal.

India accounts for about 0.2% of Russia’s natural gas exports, but at the 21st Russia-India summit last December, both nations reaffirmed their commitment to increasing sourcing of Russian crude on long-term contracts through preferential pricing, strengthening LNG imports to India, and the possible utilization of the Northern Sea Route for energy supplies.

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