Indian Refiners Face 40% Crude Oil Cost Surge As Middle-East War Disrupts Flows

Oil marketing companies are paying as much as 35-40% more to procure crude than they were a month and a half ago, as disruptions to Middle East supply routes squeeze the availability of physical barrels and drive up the cost of replacement cargoes. The cost of crude for some refiners has risen to about $120-$130 per barrel, compared with Brent at around $105-$109, according to people familiar with the purchases.

Some refiners have paid as much as $150 per barrel for prompt cargoes as competition intensifies for barrels that can be delivered on time. 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, industry executives said.

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How is Iran war-led oil shortage impacting India?

The shutdown of the crucial Saudi Arabia's East-West pipeline has added to the pressure. The 1,200-kilometer pipeline, which runs from the kingdom's eastern oil fields to the Red Sea port of Yanbu, has a capacity of about five million barrels a day, equivalent to roughly 4% of global oil supply. It also provides Saudi Arabia with an alternative route to the Strait of Hormuz.

The outage, however, does not necessarily mean an equivalent volume of Saudi crude will be lost from the global market, according to industry executives. But it removes a key route for moving barrels to the Red Sea and could force more Saudi crude through the Strait of Hormuz, where shipping has already been severely disrupted.

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For Indian refiners, the immediate concern is the cost of replacing Saudi barrels rather than an outright shortage of crude. India has relatively limited direct exposure to the Yanbu route. Saudi supplies averaged about 315,000 barrels a day in August, compared with India's total crude imports of around 4.7 million barrels a day. That was already down from roughly 600,000 barrels a day in March and April, when the crisis was at its peak.

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. Physical markets are showing tightness, giving suppliers the upper hand to charge premiums.

"Every trader is asking for a premium.. We are now paying at least 35%-40% more than benchmark rates," a refinery executive said. While Gulf grades are fetching premiums of $8-$10 a barrel over Brent, Russian crude supplied to India is already priced at a premium of about $2.50 a barrel, according to people familiar with the market.

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How can India tackle the pressure?

Analysts say Russian crude remains particularly important. "With multiple chokepoints facing disruption, Russian barrels routed through the Black Sea and Baltic become more valuable from a supply-security perspective," according to Sumit Ritolia, lead analyst for refining supply and modelling at Kpler.

Atlantic Basin crude provides another source of supply but longer voyages from the Americas and West Africa add to freight and insurance costs. Higher tanker rates and war-risk premiums are further increasing the landed cost for Indian refiners.

The higher physical crude costs come as global inventories have already fallen sharply. The International Energy Agency estimates that 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.

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Outlook

Indian refiners have sufficient crude coverage through October, but all eyes are on November cargoes as buyers begin securing supplies amid uncertainty over Middle East flows.

A prolonged disruption could push replacement crude costs higher even if sufficient physical supplies remain available.

The impact of higher procurement costs could become more visible in third-quarter results as more expensive replacement cargoes feed through into refiners' crude costs and margins.

The extent of the impact will depend on cargo-delivery schedules, inventory levels and the duration of the disruption. For now, the pressure is being felt primarily in the cost of securing and delivering crude, rather than in an immediate shortage of oil for Indian refineries.

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