India has relatively limited direct exposure to the Yanbu route. Saudi supplies averaged about 315,000 barrels a day in August, compared with total Indian crude imports of around 4.7 million barrels a day.
Indian Refiners Face 40% Crude Cost Surge As Middle East War Disrupts Flows
India has relatively limited direct exposure to the Yanbu route. Saudi supplies averaged about 315,000 barrels a day in August, compared with total Indian crude imports of around 4.7 million barrels a day.
Indian refiners are paying as much as 35-40% more for crude than they were a month and a half ago, as disruptions to Middle East supply routes squeeze physical markets and drive up the overall cost of getting crude oil to India.
The cost of crude for Indian refiners has risen to about $135-140 a barrel, compared with Brent at around $105-$109, according to people familiar with the purchases. Notably, the $109 price is for delivery of barrels in November. Some refiners have paid as much as $150 a barrel for prompt cargoes as competition intensifies for barrels that can be delivered on time.
Industry executives say that delays to scheduled cargoes and disruptions across key oil transit routes are forcing refiners to turn increasingly to the spot market, raising both crude prices and the cost of bringing barrels to India. Higher tanker rates and war-risk premiums are adding further pressure to landed costs.
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“Every trader is asking for a premium. We are now paying at least 35%-40% more than benchmark rates,” said a refinery executive, on condition of anonymity.
The shutdown of Saudi Arabia’s East-West pipeline has added to the pressure.
The 1,200-kilometre pipeline, which runs from the kingdom’s eastern oil fields to the Red Sea port of Yanbu, has a capacity of about 5 million barrels a day and provides Saudi Arabia with an alternative to the Strait of Hormuz.
The outage does not necessarily mean an equivalent volume of Saudi crude will be lost from the global market. But it removes a key route for moving barrels to the Red Sea and could force more Saudi crude through Hormuz, where shipping has already been stressed.
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For Indian refiners, the immediate concern is, therefore, the cost of replacing barrels rather than an outright shortage of crude, according to Umud Shokri, an energy strategist and geopolitical analyst based in the US. The premium per barrel goes beyond crude to include quality differentials, freight, insurance, financing and premiums for securing prompt cargoes, he said.
India, meanwhile, has relatively limited direct exposure to the Yanbu route. Saudi supplies averaged about 315,000 barrels a day in August, compared with total Indian crude imports of around 4.7 million barrels a day.
Still, the disruption is intensifying competition for alternative barrels. Indian refiners are relying more heavily on Russia, followed by the US, Brazil, Guyana and West Africa, while Iraq and the UAE are also emerging as options.
But these replacement barrels have turned costlier. Russian Urals, which accounts for around 40% of India’s crude imports, is now being offered at a premium of $8-9 a barrel to ICE Brent on a delivered West Coast India basis, said Natalia Katona, an Abu Dhabi-based commodity analyst. ESPO, a smaller part of India’s import slate, is commanding a premium of around $28 a barrel over Brent, she told NDTV Profit.
Murban, now the second-largest grade in India’s import mix, with purchases of around 400,000 barrels a day in August, is also trading at a premium of $10-15 a barrel to Dubai, which itself is currently reading at around $117/barrel, Katona said.
Venezuelan Merey is another important grade, particularly for Jamnagar refinery, because it is very heavy and sour. “On paper, Merey trades at a discount of around $15/bbl to Brent. But once you add freight of roughly $24/bbl, its delivered cost is effectively $10-11/bbl above Brent,” Katona added.
Saudi exports are currently being loaded exclusively in the Gulf, with freight rates reaching $35 a barrel because of the risks to tankers crossing Hormuz, Katona said. If the disruption to Saudi Arabia’s East-West pipeline lasts for more than seven days to 10 days, buyers could face significantly higher costs, she said. “The market preparing for Dubai crude to potentially reach $140-$150.”
The higher physical crude costs come as global inventories have already fallen sharply. The International Energy Agency estimates global oil inventories have declined by about 507 million barrels since the start of the war, with stocks drawing at an average rate of 2.8 million barrels a day.
Indian refiners have sufficient crude coverage through October, said refinery executives. But all eyes are now turning to November cargoes.
According to Naveen Das, senior oil analyst at trade analytics firm Kpler, the market should watch how quickly the repairs at the pipeline pumping stations are carried out and whether any bypass contingency routes are working.
“It is also important to track how crude oil loadings out of Yanbu carry on, to see whether there is a material drop as storage there is limited,” he added. Finally, it will be important to see how vessels can move to Saudi Arabia’s East Coast, and whether they are able to get barrels out of the Strait of Hormuz without being attacked, he said
Shokri believes that India can avoid an immediate supply crisis, but a prolonged outage would raise the country’s import bill, pressure the rupee and increase the risk of higher domestic fuel prices. Simultaneously, replacement crude could also become more expensive even if physical supplies remain available.
