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US crude a winner as demand shift prompts Indian refiners to lighten slate

Highlights

Plentiful WTI Midland, Bakken crude to arrive

Refiners cutting purchases of diesel-heavy crudes

Refiners keen to maximize LPG, naphtha production

Singapore — The structural shift in India's oil products demand pattern in favor of products like LPG and naphtha and away from diesel have prompted refiners to lighten their crude slate, a move that may help US crude imports to post positive growth in 2020 despite overall crude inflows slipping into the red, analysts told S&P Global Platts.

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The South Asian consumer is witnessing an unusual rise in appetite for relatively lighter US crude grades, such as WTI Midland and Bakken, in addition to usual inflows of Thunder Horse and Eagle Ford crude, analysts added.

"India's imports of US crude are likely to stay modest in the near term as refinery runs have not recovered to full capacity, but should pick up more strongly in 2021 as demand rebounds," said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics.

India, one of the fastest-growing oil markets in Asia, is inching closer to end 2020 with negative oil demand growth, a trend not seen for nearly two decades. As a result, overall crude imports from all origins is expected to fall by double-digits. But the impact on US crude would be relatively lower.

S&P Global Platts Analytics expects Indian oil demand to fall 515,000 b/d year on year to 4.5 million b/d in 2020, before rebounding by 485,000 b/d in 2021. The last time India witnessed negative growth in oil demand was in 2001, when consumption fell marginally from 2000 levels.

"WTI Midland and Bakken would account for about 80% of the volumes that's coming in November to India from the United States. The rising preference for lighter US crude grades will continue in the near term, provided arbitrage economics work. It could undercut some Middle East crude volumes," said Senthil Kumaran, head of oil for South Asia at Facts Global Energy, or FGE.

LIGHTER CRUDE SLATE

FGE expects a 60,000 b/d rise in US crude volumes into India in 2020, while overall crude inflows are expected to fall by about 12% year on year.

"While personal mobility over public transport has supported gasoline, but diesel is getting knocked out across the sectors. It's a structural shift in trends that we are witnessing. The refining system is caught at the crossroads, but it will gradually adjust to the change," Kumaran said.

"While refiners blended more kerosene into the diesel pool in H1, they are now maximizing naphtha and LPG at the cost of diesel. Diesel inventories are still too high despite some seasonal pick up in consumption seen in recent weeks," he added.

A senior official at a leading Indian refiner said that while private refiners were largely buying spot North American crude, including Canadian crude on an FOB basis, state refiners were largely taking in shipments on a CFR or DES basis.

"The current inflows of lighter US crude grades is helping to match the current demand pattern in the country," the official added. "Refiners are looking at some relatively lighter crude supplies and may reduce volumes of diesel-heavy crude inflows from the Middle East."

US crude exports to India were 232,000 b/d in the January-September period, down 10.5% year on year from 259,000 b/d in the same period a year earlier, US census data showed. However, September volumes alone were 276,000 b/d, a rise of 11% year on year from 248,000 b/d in the same period a year earlier.

"Supply instability in the Middle East last year had brought to forth concerns about supply security and the US has been an important source for India as it continued to diversify its crude imports. But US crude exports to India over the first nine months of this year eased slightly year on year, partly due to the impact of COVID-19 as Indian refiners cut crude runs as oil demand collapsed," Lim said.

SCOPE TO BOOST INFLOWS

State-owned refiner Indian Oil Corp ran its refineries at a 90% rate in October riding on improved demand as the economy gained momentum after the unlocking of the country. IOC's nine refineries operated at 77% in September, 61% in August, 83% in July, 89% in June, 67% in May, and 49% in April.

In September, the average run for all categories of refineries in India improved to 86% from 76% in the previous month, showed the latest survey Oct. 26 from the Indian oil ministry. Market sources said Indian refiners could increase their processing rates to 90% by November and 100% or more by December.

India's growing interest in the US crude has helped to strengthen energy relations between New Delhi and Washington.

India and the US earlier this year signed a memorandum of understanding to begin cooperation on Strategic Petroleum Reserves, comprising both operations and management, and discussed the possibility of India storing crude in US SPRs. Analysts said this would help to boost US crude flows to India.