American crude oil (West Texas Intermediate) is cheaper by $23 a barrel to ‘Brent', the alternative benchmark of the oil industry. But Indian refiners say they prefer to continue purchasing oil at prices that are linked to the Brent.
The reason? In their view, the price anomaly between the two is a short-term phenomenon. In any case, loading, inland movement and a longer ocean voyage involved in buying American crude oil narrows down the price difference to a point where it is not worthwhile, they say.
Price differential
The average price of crude oil in August (till August 10) at which Indian refiners purchased has been higher than WTI. While the WTI averaged $87.81 a barrel, the Indian crude basket averaged $108.63 a barrel.
WTI, traded at the New York-based commodity exchange (NYMEX), a superior variety of crude oil, is mainly available in the US market.
“It is not only the price differential but also volumes that matter. At the end of the day, refiners have to see what gives them the best gross refining margin (GRM). Besides, most refiners prefer crude oil which is the marker (benchmark) for that region,” industry sources said.
The GRM is the difference in dollars per barrel between the product revenue and the cost of raw material. It is one of the factors that represent the economics of a refinery. The refiners see the cheapest possible product mix which gives good yields and improves the GRM.
Most of the global suppliers mark their crude oil to markets which they are selling to. For example, the Venezuelan crude oil being sourced by some of the Indian players is marked to the price that represents the Asian market – Singapore-Dubai.
Even the crude sourced from the spot market reflects the region for which it is being supplied. Besides, Brent is the highly traded crude.
OPEC basket
The OPEC basket price represents an index of 12 grades: Algeria's Saharan Blend, Angola's Girassol, Iran's Iranian Heavy, Iraq's Basra Light, Kuwait's Export, Nigeria's Bonny Light, Libya's Es Sider, Qatar's Marine, Saudi Arabia's Arab Light, Murban of UAE, Ecuador's Oriente, and Venezuela's Merey.
Indian refiners source from all these producers.
The Indian crude basket represents the published FOB prices of averaged Oman/Dubai crude oils for sour grade and Brent (dated) for sweet grade and the composition is determined by the processing capacity.
In 2010-11, domestic refiners sourced 163.595 million tonnes of crude from 30 countries of which about two-thirds came from West Asia.