In a bid to manage inventory better and check potential losses, state-owned Bharat Petroleum Corporation Ltd (BPCL) will not buy extra crude to take advantage of the drop in prices due to the coronovirus outbreak, a top executive has said.
From about $70 a barrel about two months ago, global crude prices have dropped to about $55 a barrel, helping BPCL save money on its crude purchases.
On top of it, there is an extra price reduction of $3-5 per barrel on opportunity crude — distress crude looking for buyers after being rejected by China. This will be available in significant quantities over the next three or four months.
‘Opportunity’ crude
BPCL sources a big chunk of its annual crude requirements from the Arabian Gulf. “The falling crude prices due to the virus is an opportunity for the Indian industry,” said R Ramachandran, Director (Refineries), BPCL at a media interaction. “If we purchase only term crude, you will see the $15 dollar reduction. On the cargoes which are opportunity, we see a further reduction because Saudi Aramco is not selling distress cargo.”
“There is a significant increase in crude availability, which actually is an opportunity for us to look at lower (priced) crudes. Some of the crudes which we were not finding attractive in the normal course...today they are figuring in our slate of spot crude purchase basket,” he said.
For instance, some African and Latin American crudes, which previously were not even figuring in the value creation matrix of the refiner while selecting crude, are now available at a discount, making them attractive to the buyer. “We don’t want to buy extra crude; we have to be very careful because the price is going to remain low as we think today,” Ramachandran said.
“We need to be careful to manage our inventory, not to have extra crude because, as refiners, at the end of the year, we are going to be seeing a price differential between the crude which we purchase and the product value we create, that is the inventory gain/loss. And then, if we are holding on to crude which is high quantity with low value, then when you do accounting for the whole year, you will see much more losses. So, managing the inventory today is an important thing for us,” he added.
Price swing
The price swing emanating from the health crisis, according to Ramachandran, will inflict inventory losses on refiners globally. “Fundamentally, we need to be looking at how to manage inventory by the end of the year. So, we will be very careful in monitoring how we can strike a balance between making sure crude is available for processing and at the same time not buying extra crude when the price is low,” he said.
Further, with the forward market not giving any clear indications on a price increase, and the possibility of the virus spreading further or prolonging, the current price will hold for some time, he reckoned.
“The way I will act on this is, we will try to assume that the price is going to be low, so we are happy with working capital; but, at the same time, we are also vary of having inventories compared to what the original purchase prices were at the beginning of the quarter or beginning of the year, for the annual accounts. So, we will try to see how much we can deplete our quantities without compromising on our refining system — that’s the only thing we can do now,” he added.