Spotlight on India
Nov. 18, 2022
India currently imports most of its crude oil and gas needs and the country exports refined oil products such as ultra-low sulfur diesel and jet fuel, notably to Europe and sometimes the US Atlantic Coast among more “typical” destinations such as Southeast Asia and East/South Africa. This year, India has shown a strong appetite for discounted Russian crude, and future purchases of Russian crudes by Indian refiners will likely depend on how the EU ban shapes up for seaborne trade and whether these imports will still make economic sense given high freight rates and the resulting market structure.
India’s refineries are currently ramping up from their planned maintenance schedules and we will likely see crude imports remain elevated in the coming months. Since the start of the Russia-Ukraine conflict, Russia’s share of India’s imports rose to nearly 1 million b/d according to the IEA. In October 2022, this represented a 21% share, comparable to Iraq’s market share and topping Saudi Arabia’s market share of approximately 15% of the country’s import basket. Nevertheless, the Middle East remains the largest supplier of crude to India, representing about 55% of the country’s total crude imports. India’s penchant to absorb cheap Russian crude has lessened their appetite for African crudes. Their imports of West African dropped from 12.5% in January-September 2021 to 8.4% in the same 2022 period according to the same data.
We believe India is in a particularly pivotal scenario as they have greatly benefitted from cheap input costs to their refineries through 2022. This past week US Treasury Secretary Janet Yellen said the price cap could work in India’s favor by giving it extra leverage to purchase Russian crude at deep discounts. We are skeptical of effective implementation of the price cap if the country would not be able to utilize Western insurance, finance, and maritime services, although our expectation has been that Russian crude will continue to flow to the region perhaps on increasing numbers of Russian-owned or even ghost tonnage.
Nevertheless, India’s refining capacity is projected to grow by 1.03 million b/d in the period 2023 to 2026, presenting various export opportunities. One of India’s top 10 trades involves flows to Southeast Asia on LR1 tonnage. Ton-mile demand for this route is forecast to grow by 10% in 2023. We are also forecasting the India to East Coast North America ton-mile demand to grow by 9% in 2023, with potential of a surprise to the upside should the distillate (gasoil/diesel) shortage become even more severe in the US. This dichotomy shows the strategic opportunities that India has at its disposal in terms of optionality to ship their refined products both East and West, something that could benefit LR and MR tonnage ton-mile demand from the region in the medium term.
Figure 1: Annual Refining Capacity Increases w/ Forecast
Source: McQuilling Services, JBC Energy
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