Oil prices have remained largely unchanged after the additional 25% tariff announcement by Trump last night. What really is the oil market pricing in at this point? What assumptions could be at play here and what levels are you spotting for Brent as of now?
Probal Sen: I wish I had clear definitive answers to any of those. Let us put the numbers in perspective. All said and done, Russia still exports at last count, close to about 4.7 million barrels of oil per day. They produce obviously much more, but they have some internal consumption as well, that they are seaborne in exports in that range of around 4.7 million barrels. At one point of time, India was importing close to two million barrels a day of that with most of the balance going to China. Last year, our understanding was that this crude was available to us at basically $4 -5 discounts to benchmark. Now on the face of it, with the new sanctions that the EU has put in place, this price should actually go down. But there is an additional cost that is coming through for logistics. For insurance, for arranging vessels, for freight, everything else gets costlier because of the compliance with sanctions.
So, effectively speaking, the amount we can import has actually reduced. Some reports indicate on July 25, we imported about 1.5 million barrels, and that is already way down from the 2 million barrel a day number that I mentioned which was there last year. In terms of global impact, replacing 4.7 million barrels of oil per day from the global supplies is not going to be easy. Trump’s attempt is basically to make it costlier to trade with Russia and reduce the netbacks that they are getting from these exports. Obviously, the kind of supply uncertainty that comes through if people see those flows getting impacted, then obviously prices can escalate very sharply.
The reason perhaps prices have not moved all that much is one, OPEC at the same time is unwinding most of its two million barrel a day supply cuts that they had put in place for a long time and two, there is probably a belief that these barrels will probably get more difficult to export and the flows might become costlier. It’s not that these supplies would completely go off the global trade system altogether. Plus the fact that demand obviously is not really growing as much as probably people would like, estimates are varied for CY25.
OPEC has a much more optimistic one million barrel a day plus kind of an estimate. Demand is uncertain while supply can be a little bit constrained, but as of now, people are looking in a wait- and-watch mode before taking a call on where prices will move. For India, it is definitely a negative with both supply certainty as well as the cost of those supplies, becoming more adverse than they were earlier.
What will be the impact on OMCs in both cases? Either we buy from Russia or we do not buy oil from Russia and find another alternative?
Probal Sen: If we continue to buy from Russia, our understanding is that while there is still maybe a little bit of a discount with respect to benchmarks, that level of discount has come off quite a bit. So, to do a very simple math, if you are buying 25% of your requirements from Russia and you get a discount of let us say $5 versus benchmark, that is a straight $1.25 per barrel addition to your GRM. If that discount actually comes down to $1, that is just about a 25% advantage, so that is the clear impact that will be there if this crude continues to flow. If you do not get any of this crude and you have to sort of resort to alternate sources of crude at this point of time, obviously again, the same math applies that at this point of time or at your peak, you were taking as much as 40% of your requirements from Russia at a discount of somewhere around $4 to $5 and that was giving you an additional $2 a barrel in terms of GRM. That GRM advantage basically goes away. On top of it, Singapore GRMs have already softened to less than $3 in recent weeks and they are averaging about $2 lower at this point of time if I take July average or August till date versus Q1. In any case, the earnings situation in the near term would look a little bit more vulnerable.What is the worst case scenario for both India and for the listed energy universe? Is it the worst case for OMCs and oil refiners as well?
Probal Sen: Honestly, the worst case is that these flows get restricted and there are near-term constraints on arranging crude in the first place from alternate sources. But frankly, it is a very unlikely scenario that is at least in my limited experience, that is not the way global trade works. I would say the worst case is that the costs basically go up by maybe a couple of dollars and therefore GRMs remain under pressure. I would not see anything other than that playing out. Obviously one cannot predict. There are multiple conflicts going on in several parts of the world and the US has been fairly unpredictable in terms of its decisions. But I do not think the flows will get disrupted beyond basically an increase in the cost.
With OPEC plus over supply superseding the impact of the Russian supply being out of the global supply equation, will oil prices fall or the other threat that Donald Trump could be coming out with similar sanctions on the other nations that are importing oil from Russia., will it take the oil prices higher if at all that takes place?
Probal Sen: Oil prices will basically go higher if on the ground, we see supplies being reduced from Russia’s side. Tracking the data in terms of shipping data and flow data shows the supplies going out of the system which means it is not something that will be invisible. We will start to see impact on the ground in terms of refinery runs, availability of crude and so on and so forth. We would probably see a much more bullish reaction.
At this point of time, based on news events, based on pronouncements, based on intent, people are still probably waiting and watching to see how all of this plays out on the ground and whether this has an impact on flows coming out of Russia. I still think you may not see a huge spike in crude prices, but I would not advocate for any softness either. You are probably likely to see a $70-75 range at this point of time and then a definitive move either way depending on how all of this plays out over the next couple of months.