As crude oil prices drop, domestic refiners fear inventory loss

In the past 10 days, the price at which Indian refiners bought crude oil was almost $10 a barrel lower. But refiners are not rejoicing.

Indian Oil Corporation, the country’s biggest public sector refiner-cum-retailer, is concerned. “While this is good for the import bill, for companies like ours it means heavy inventory losses,” the company’s Director-Finance, AK Sharma, said.

Crude oil prices have been on a downward spiral over the last couple of months. Oil companies typically keep stocks for 30 days. They incur an inventory loss when the price at which crude is purchased is higher than the prevailing price. For example, if the price was $90 a barrel when purchased and then dropped to $80 a barrel, the buyer incurs a loss of $10 a barrel.

IndianOil is yet to work out the exact inventory loss for the current quarter, but Sharma told BusinessLine “it will be significant.” Even in the second quarter, IndianOil had suffered an inventory loss of ₹4,272 crore.

RS Butola, former Chairman of IndianOil, said: “What impacts the performance of the oil refiners is not the absolute crude oil prices but the differential — the difference between the refined product price (output cost) and the crude oil prices (input cost). It will not be right to interpret the decline in crude oil prices as an advantage for refiners. ”

In April, the Indian crude oil basket averaged $105.62 a barrel, and slid to $77.58 in November.

For upstream companies also, it is a wait-and-watch situation. Cheap oil has not resulted in distress sale of oil assets, said an official with ONGC Videsh Ltd. Big players are holding on to assets and only small players who have taken debt want to exit.

The drastic drop in prices would also mean exploration companies going slow as input costs are high. While the global oil market is now seeing more supply, two-three years down the line, this will change, say experts.

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