Why discounted Russian crude oil hasn't cooled retail fuel prices

Indian refiners are not passing on the cost savings derived from purchasing discounted Russian crude oil to the end-users of diesel and petrol, according to data gleaned from actual imports of oil and the benchmark index of the Indian crude import basket.
 

The pump prices of both petrol as well as diesel have been unchanged since April 6, if one excludes the impact of the excise cuts in May, despite a sustained inflow of cheaper crude oil from Russia in the aftermath of the war in Ukraine.
 

Indian refiners price petrol and diesel off international benchmarks rather than sourcing and production costs, enabling them to use savings from sourcing Russian oil to boost their margins instead of passing them on to retail consumers.
 

“India may have bought 910,000 barrels a day of Russian crude in July, with volumes declining for the last week of July as well as the first week of August,” said David Wech, chief economist at London-based commodity data analytics provider, Vortexa, which tracks ship movements to estimate imports. He expects volumes to rise to 1.1 million barrels a day in the second week of this month.

Russian crude oil cost $16 a barrel less in May compared to the average Indian crude import basket price that month of $110 a barrel, reflecting substantial gains to importers that include Indian Oil Corporation (IOC), Reliance Industries, and Nayara Energy. The discount was trimmed to $14 a barrel in June, when Russian oil cost $102 a barrel and the Indian crude basket averaged $116 a barrel.

Russian crude oil, which was less than 1 per cent of imports prior to Russia’s invasion of Ukraine in February, rose to 8 per cent of India’s crude oil import volume in April, 14 per cent in May, and 18 per cent in June. But the cheaper Russian purchases are not reflected in the Indian basket of crude oil, which consists of crudes most sought after by Indian refiners and used as a starting point to price petroleum products.
 

The Indian crude basket is an economic indicator used by the government for making assessments of costs and crude oil imports and policymaking. The index used in the Indian crude basket measures India’s largest suppliers, mainly from West Asia. But India's benchmark oil index has failed to reflect the lower costs of Russian crude oil.
 

An official with a state-owned refiner said investments in refining will dry up if oil marketing companies started benchmarking local production costs to fuel prices.
 

IOC sold petrol at a loss of Rs 10 per litre and diesel at Rs 14 a litre during April-June, resulting in a net loss of around Rs 1,993 crore in April-June. The losses would have been greater but for the gains reaped from the cheaper Russian grades, said a Mumbai-based analyst. IOC does not disclose its purchase costs nor the basis on which it calculates its losses, the analyst said.