Indian refiners limit cuts to May Saudi crude imports

State-controlled Indian refiners have asked to buy around 9.5mn bl (305,000 b/d) of term crude from Saudi Arabia for May loading, lower than typical levels in line with a government directive to reduce the country's dependence on Mideast Gulf crude, a senior official involved in the import talks said.

The planned cuts to India's May nominations come as souring relations between Delhi and Riyadh have prompted a renewed import diversification drive. But the extent of the proposed May cuts is relatively mild — equivalent to only around a 5pc decline on pre-Covid import levels, according to Argus' analysis of state-controlled importers' internal purchase data — and in line with a potential fall in fuel demand as India fights a resurgent Covid-19 outbreak.

State-run IOC, Bharat Petroleum and Hindustan Petroleum imported a combined 17mn t/yr (10mn bl/month or 340,000 b/d) of crude from Saudi Arabia in the April 2019-March 2020 financial year, before the pandemic disrupted trade flows.

Saudi arrivals fell to an average of around 8.8mn bl/month, or 290,000 b/d, in the 10 months between April 2020 and January 2021, in line with a drop in India's total imports, the company data show. State-controlled Saudi Aramco has typically cut its allocations to Asia-Pacific buyers over the past year to comply with Opec+ production curbs, which may have sent actual deliveries below contractual volumes.

Smaller refiners MRPL and HMEL buy some Saudi crude under term deals, and private-sector Reliance Industries (RIL) and Nayara take a significant amount of Saudi crude. Privately operated companies are not covered by the government directives.

India's crude imports from Saudi Arabia fell to 753,000 b/d in 2020 from 855,000 b/d a year earlier, as the Covid-19 pandemic hit demand. Imports were 640,000 b/d in the first quarter of this year, according to Vortexa.

The relationship between India and Saudi Arabia has come under pressure since Opec+ cuts helped send Ice Brent crude futures prices to around $70/bl last month. Delhi has complained about Opec+ policies, leading Saudi Arabia to suggest that India withdraws some of the lower-priced crude stocks it built up when markets crashed last year.

High fuel taxes in India have helped send pump prices to record levels, making oil prices a sensitive political issue. Oil minister Dharmendra Pradhan, under pressure to reduce prices, has resent instructions to state-run refiners to diversify their crude supplies, officials at the refiners said.

Few choices

But India's options to replace Saudi crude are limited. No other nation can consistently offer the combination of large volumes, flexibility in terms of grades and short voyage times that the Saudis have offered for decades.

The UAE, Kuwait and Iraq typically follow Riyadh in setting prices and would not be willing to take significant market share from Saudi Arabia, an official from an Indian state-oil company said.

Nigeria, which is India's biggest supplier in Africa, signs term contracts every year with Indian state refiners but never meets its commitments. And US supplies are inconsistent and suffer from higher freight costs.

Indian state-run refiners can anyway obtain higher margins from processing Mideast Gulf crudes, even if other sources are cheaper, as their refineries are geared towards taking Middle East supplies, a top refining official said. India paid an average of $54/bl for Saudi Arabia's largely medium, sour crude in January, while Iraqi grades, which vary from light to heavy crudes, cost $48/bl, according to the most recent government data. The US supplied mainly light, sweet grades at an average cost of $51/bl.

At times when the WTI-Dubai spread is flat, it makes little sense to take a cargo of Mars from the US rather than a comparable Arab Mix from Saudi Arabia, an Indian official said. US crude takes around 40-50 days to arrive on smaller tankers, compared to a few days from Saudi Arabia on very large crude carriers (VLCCs), leaving refiners exposed to the price risk. US crudes are only viable on spot terms provided freight rates are low and WTI is trading well below Brent, unless Indian refiners are prepared to sacrifice margins for political reasons, the official said.

Riyadh can sometimes make concessions over allocations for countries where it has sizeable investments, but is less inclined to accommodate India, where the planned 1.2mn b/d Ratnagiri refinery project in which Aramco has a 25pc stake has stalled for years, an official said.

India's crude imports fell to 4mn b/d in February from 4.6mn b/d in January, according to oil ministry data, as cases of Covid-19 surged anew. New cases rose to a record of more than 131,000 b/d yesterday, threatening more lockdowns that could further curb fuel demand.