The diesel export ban by Russia opened a unique opportunity for India to shore up export revenues in times of falling global merchandise trade and rising crude oil prices. The benefit may be felt in managing the current account deficit, which was 1.1 percent in June and was expected to be wider. The export of refined petroleum products at a premium may help arrest the trend.
Bloomberg reported on September 30 that “Russia plans to reduce diesel exports from its key western ports to almost nothing next month (October)”. Notably, October is the peak winter stocking period which lasts up to the first or second week of November. The ban came on the back of a cut in crude production by the Organisation of the Petroleum Exporting Countries (OPEC) in July. Crude prices (WTI) last reached a decadal high of nearly $116 a barrel on June 6, 2022. However, it failed to hold the peak and declined steadily to settle at around $70 a barrel during the June quarter of this fiscal. India played a crucial role in bringing down the prices in 2022 by buying Russian crude at a deep discount, ignoring the US sanction.
Elevated Prices
The situation has been in reverse gear lately. Firstly, the reopening of China (after prolonged Covid lockdowns) and fast growth in India increased the oil demand. The discount on Russian crude was reduced dramatically. The production cut by OPEC made the market tighter. Crude is now nearing the $100 a barrel mark. Reuters reported on September 28 that India was buying Russian crude at $80 a barrel.
There are many predictions on where crude prices should reach and how long that level can be held. However, there is little doubt that the crude market has been exceptionally tight in the stocking season. If that’s not enough, Russia imposed an export ban on September 21, under the pretext of correcting the “domestic market anomaly”, The geopolitical undertone behind the decision is anybody’s guess.
Russia is the world’s third-largest petroleum refiner, followed by India at the fourth spot. The US and China hold the top positions. Naturally, its absence will matter. The diesel prices were already rising in tandem with crude price hikes. Between July and September 25, pump prices in the UK increased by 11 percent. If the export ban is sustained, prices may zoom this month, creating a windfall opportunity for India.
Refined petroleum products have been India’s top export item since 2018. According to the International Trade Centre trade map, petroleum exports increased by nearly 75 percent from $54 billion in 2021 to $94.4 billion in 2022, contributing over one-fifth of India’s total export earnings. The country became a top exporter to Europe. The trend has continued this year. Germany reported a 12-times rise in the import of mineral oil products from India during January-July 2023.
Complex Calculation
Notably, Indian refiners benchmark product prices in India to the international parity level. This coupled with the spike in crude prices should have created a case for a rise in auto-fuel prices in the domestic market. However, the (unofficial) levelized retail pricing mechanism adopted last year, might help reduce such possibilities. India hiked the pump price of fuel at the peak of the Ukraine crisis in the June 2022 quarter and kept it unchanged since, anticipating further volatility. The strategy should pay off this time. India may bypass a hike in the retail price of fuel unless global prices set new records or stay at a high level for too long. The dominant expectation is, it wouldn’t.
There are, however, other concerns. In 2022, India and Russia traded crude oil through the age-old Rupee-Ruble mechanism, before stumbling on the same problem that once made it redundant. The Indian rupee is not a global currency. Russia can only use it against imports from India. And, Moscow has a trade surplus with India. The trade balance increased by seven times to $37.7 billion in 2022. Russia refused to continue with the mechanism this year.
It means, there will be pressure on India’s forex reserves and the value of the rupee vis-à-vis dollar. The situation might take a negative turn if the services export falter. Keeping in tune with the shifting preference of the developed West, services have been the growth engine of India’s foreign trade since the second half of last year. The equation may change if the US and/or Europe slows down further. According to ‘Global Recession Watch’ of Bain & Company, “economist polls have suggested an elevated likelihood of a recession in the US and eurozone for nearly a year, though the level of conviction has varied.”
Pratim Ranjan Bose is an independent columnist, researcher, and consultant. His Twitter handle is @pratimbose. Views are personal, and do not represent the stand of this publication.
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