Refining output dips again after nearing pre-Covid levels amid low local demand

NEW DELHI: Refinery run rates are again falling in the country after reaching near pre-Covid levels, which may reduce crude oil imports, as local lockdowns, monsoon and record prices have hit demand.
Average capacity utilisation at Indian Oil Corp, the nation’s largest refiner, has declined from 94 per cent to 85 per cent in a week as domestic demand recovery stalled in July and the export market remained oversupplied, a company executive said. Run rates at Hindustan Petroleum and Bharat Petroleum too have fallen, as per industry executives.

This is lowering crude purchases by refiners. “We will have to cut back on crude purchases. Oil is no more so cheap that we would want to buy it for storing it,” said an executive at a state-run refiner. Crude oil prices have more than doubled to $43 a barrel since late April. “We will mainly cut back on spot purchases and optional quantities under term deals,” he said.

In the last few years, state refiners have usually sourced 30 per cent from the spot market and the balance under annual purchase deals, which typically have both firm and optional quantity commitments.


For refiners, it wouldn’t be difficult to cut purchases as key suppliers such as Saudi Arabia and Iraq too are reducing exports to meet their production cut targets, the executive said. Nearly two dozen producers, led by Saudi Arabia and Russia, have agreed to keep an artificial lid on production to support prices.

Export markets are facing a glut and margins on most refined products, except diesel, are negative these days, the executive said, explaining why state-run refiners are not too keen on exports to keep their run rates high.

Domestic demand for diesel dropped 18 per cent in the first fortnight of July compared to the previous month’s first half. Petrol sales dropped 6 per cent in the same period. Compared to the year-ago period, the decline in sales was 21 per cent for diesel and 12 per cent for petrol. Diesel and petrol together make up almost half of India’s oil demand.

Jet fuel, which accounts for about 4 per cent of total oil demand, is making a slow recovery due to limited planes in the skies. Demand for jet fuel rose 11 per cent in July's first half compared to the previous month but is down 67 per cent from last year.

Several states have re-imposed limited lockdowns in the past few weeks, restricting mobility and economic activity and snapping the fuel demand recovery streak, industry executives said. Industrial and construction activity has picked up since nationwide lockdown restrictions were eased but must accelerate now to further boost fuel demand, HPCL chairman M K Surana said.

Record diesel prices too have contributed to the weakening of demand, executives said. Since June 6, when oil companies started raising prices, rates for diesel and petrol have gone up by Rs 12.25 and Rs 9.17 per litre, respectively.