OMCs Look at More Spot Buying of Crude With Prices Falling
Public sector oil refiners BPCL, and IOC plan to increase spot buying of oil from the market to take advantage of the low global crude prices and boost their margins.
A source in the Indian Oil Corporation said that spot purchases in the next financial year may be higher and it could go up well over the usual purchases (30 per cent level) under that route if low crude prices maintain over next few months.
Oil refiners usually buy crude in 70:30 ratio of term cargoes vis-a-vis spot deliveries. This also depends on inventory position with the company and demand projections in the market. However, with global crude oil prices falling almost 50 per from early January levels and dropping more than 35 per cent in last 8 days to just about $30 a barrel now, oilcos are looking to make the most of situation to reduce their cost and boost gross refining margins (GRM).
According to ICICI Securities, the recent plunge in oil prices has boosted OMCs' GRM by $1.9-3.0/bbl to $5.1-5.9/bbl on March 13 from $2.9-3.3/bbl on March 5. This could go up well above $6 barrel in FY21 if demand conditions do not worsen on Covid-19 outbreak.
"It's not just higher spot buying of crude, Indian companies would also seek higher discount on crude under deliveries from next month under term contract. Saudi Aramco has already indicated to this possibility," said the source quoted earlier.
On its part, Bharat Petroleum Corporation has reportedly bought two million barrels of extra Saudi oil for loading in April. It is also exploring buying additional oil from the United Arab Emirates.
IOC is also listing the option and take a call on extra oil buying later this month.
After the fallout of OPEC-Russia talks on production cut early this month, Saudi Arabia has said that it would increase production that would go a high level of 12.3 million barrels of oil per day. It has also offered discounts to buyers in various continents ranging from $5-8 a barrel. Together with Covid-19 outbreak, these have resulted in a big oil price crash.
This bodes well for India that imports over 83 per cent of oil needs. Not only are oil refiners looking to boost their profits and margins, lower crude price could also sharply bring down India's oil import bill and have positive impact on country's current account deficit (CAD). Lower oil prices would also help to keep petrol and diesel prices under check.