Oil and Gas: Purchases show where market glut bites

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The global oil market glut is helping India’s biggest crude processor become nimble, reports Bloomberg.

While Indian Oil Corp. used to buy more than 80 percent of its crude via long-term contracts, it’s cut that share down by 10-12 percent over the past three years, said Chairman B. Ashok. That’s because a flood of “light” low-sulfur crude exacerbated by the U.S. shale boom has given the state-run company more opportunities to make spot purchases over scheduled imports of heavier, higher-sulfur Middle East oil, he said.

The output-cut deal between OPEC and its allies to ease a glut has done little to shrink the flow of crude with lesser sulfur content that’s easier to process into lucrative fuels such as gasoline. Most of the supply produced in U.S. shale fields, Nigeria and Libya — all of which are exempt from the production curb agreement — are of such “sweet” variety. Middle East nations that are shouldering most of the reductions pump mostly “sour” grades that contain more sulfur.

“Middle East nations are the closest in terms of logistics and they’re giving us high-sulfur crude that we can process,” Ashok said in an interview in Kuala Lumpur, where he is attending the Asia Oil and Gas conference. “But opportunities exist beyond that geography whether it could be Africa, Latin America, North America and so on.”

The benchmark for Middle East supplies, Dubai crude, has strengthened relative to other markers as the region’s producers including Saudi Arabia cut output while supplies from the U.S. and other areas increase. U.S. West Texas Intermediate flipped to a discount over Dubai in December. The premium of Brent crude, the marker for more than half the world’s oil, over Dubai shrank last month shrunk to the weakest since 2010.

Some of Indian Oil’s refineries like its latest facility in Paradip on the nation’s east coast can process heavier crude, but others that are older aren’t sophisticated enough to do so and have to be fed lighter varieties. The company is blending the different types of supplies it purchases to streamline the feedstock going into its plants, according to Ashok.

Crude Blending

“We have blending facilities in the west coast of India as well as east coast,” he said. “We have been optimizing by blending. We have been able to source different crudes and blend it along with the others and use the cocktails.”

The company expects overall Indian oil-product demand growth of 4-5 percent will probably be sustained over the medium term, with the pace seen at about 3-3.5 percent over the next 20 years, he said. Consumption of everything from gasoline to diesel and jet fuel to liquefied petroleum gas is expanding, according to Ashok.

Increased use of trucks, cars and motorbikes spurred by rapid economic expansion has made the world’s second-most populous nation a bright spot for global oil demand, drawing interest from state-run Saudi Arabian Oil Co. to Russia’s Rosneft PJSC.

Expanding Plants

“We’re expanding our refineries depending on demand growth,” Ashok said. “A lot of capacities should come in by 2021 and the smaller ones could come in even earlier.” The Paradip facility is currently operating at about 90 percent capacity and that’ll rise close to full capacity in the fiscal year ending March 2018, he said.

To improve its crude purchasing process, the company is set to start a trading office in the regional hub of Singapore this month, Ashok said. It will initially have two traders.

“We’re looking at what gives us the best value. Most of the spot crude is low sulfur, while high-sulfur crude is from long-term contracts,” Ashok said. “We have been consciously increasing spot purchases over the last 2-3 years. There are more opportunities. It has also given us more flexibility to blend, depending on options.”

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