India's latest cut in fuel export taxes may not spur higher oil product outflows: trade sources

India's recent move to slash fuel export taxes for the second time in less than a month may not boost oil product outflows from the country amid domestic and seasonal factors, Asian middle distillate sources said this week.

Earlier this week, India reduced fuel export taxes to zero from Rupees 4/liter (5 cents/liter) for jet fuel, while the levy on diesel was cut to Rupees 5/liter from Rupees 11 /liter.

Meanwhile, the country has also raised a windfall tax on locally produced crude oil.

On Aug. 2, India raised the tax on locally produced crude to Rupees 17,750/mt (around $226/mt) from Rupees 17,000/mt.

India, the world's third biggest crude importer and consumer, meets around 85% of its domestic demand via overseas purchases.

The latest move is likely to have a greater impact on export plans of private refineries who tend to have more flexibility in determining their outflows, while state-owned companies typically prioritize domestic requirements first, sources noted.

Still, some traders said that the reduction in taxes may not necessarily lead to Indian refiners raising export volumes due to domestic factors.

While the reduction in taxes is set to increase the relative attractiveness of exporting middle distillates – gasoil and jet fuel – refinery sources based in South Asia have noted that the export volumes remain highly contingent on domestic production and consumption volumes.

"Domestic jet demand is still healthy so do not see much jet export, except for MPRL...Reliance might have some exports too, [and] also Nayara," said a regional middle distillate trader Aug. 4, highlighting the private refineries who may revise their export plans.

In addition, some refineries may begin maintenance works in August amid the ongoing monsoon season, which could reduce domestic production in the near-term, and in turn, the availability of excess barrels for exports.

Looking ahead to Q4, India is likely to see a seasonal increase in domestic demand amid the festive season, which could once again limit the availability of excess barrels for exports, market sources said.

"[There] could be some increase [in outflows] but their domestic demand [is] also healthy, so [it] will not be very excessive," said the trader.

"In the near term, we expect India's oil demand to dip sequentially by 140,000 b/d in Q3 because of the monsoon season, before rebounding by 280,000 b/d in Q4 due to festive and holiday seasons," Platts Analytics forecast on July 12.

Export tax and domestic supplies

On July 1, India had imposed a duty on overseas sale of diesel to ensure sufficient domestic supplies – especially in central-western states such as Madhya Pradesh, Rajasthan and Gujarat – as private refiners preferred to export than to sell in the local market. There were no taxes earlier on these fuels before July 1.

Private refiners Reliance and Rosneft-backed Nayara Energy - have processing units in Gujarat on the west coast.

The move was viewed as a price neutral step for the domestic market and market sources said the imposition of an export tax, which was also levied on petrol and jet fuel exports, was not surprising given that export volumes that were on the rise due to strong oil product crack margins.

The FOB Singapore gasoil and jet fuel/kerosene cargo crack spread against front-month cash Dubai – a measure of the product's relative strength to the crude it is refined from – notched record high levels in June, at $74.95/b on June 24 for gasoil, and $61.99/b for jet fuel on June 21 for jet fuel/kerosene, demonstrating the strong incentive for Indian refiners to export barrels instead of selling them in the domestic market, where prices were held steady by the public sector oil marketing companies to reduce inflationary pressures.

Similarly, gasoline cracks reached an all-time high on June 24, when the front-month Platts FOB Singapore 92 RON gasoline swap crack against Brent was recorded at $36.13/b, S&P Global data showed.

The cracks have since eased and were last recorded at $39.37/b and $30.20/b against Dubai for gasoil and jet fuel respectively on Aug. 4, while gasoline cracks were last recorded at $7.30/b against Brent on the same date, S&P Global data showed.