India’s fuel export tax to hit private refiners’ margins, marginally slows outflows

India’s recent move to impose export taxes on diesel, jet fuel and gasoline will take a toll on margins of private refiners but robust overseas demand and attractive offers will prevent outflow of cargoes from slowing sharply, while partly cushioning the blow from the new levies.

While the latest policy change on taxes is seen as an attempt by New Delhi to boost revenues at a time when the country is reeling under the impact of a ballooning crude import bill, it is also an effort to divert some marginal barrels to the domestic market where demand is showing strong signs of revival, analysts told S&P Global Commodity Insights.
“Despite the notable impact on revenues of private refiners exporting gasoline and gasoil, the imposition of additional duties will likely affect some marginal export barrels but may not affect export flows significantly as long as it makes economic sense, which it does at present, for these refiners to export,” said Shreyans Baid, analyst for South Asian Oil Markets at Platts Analytics.

India on July 1 imposed export duty of Rupee 13/liter (16 cents/liter) on diesel, while that for jet fuel and gasoline was set at Rupee 6/liter. There were no prior duties on these oil products. The government will review these taxes on a fortnightly basis.

Impact on private refiners

Private refiners in India have been processing attractively priced Russian crude, maximizing gasoil yield over co-distillate jet fuel due to better profit margins amid record high gasoil crack spreads and increasing exports in tandem to take advantage of surging international prices, market sources said.

“The Indian government has introduced a new export tax on fuel exports driven by fuel shortage and rising domestic energy prices. The impact of the export tax will have a major impact on Reliance given it is one of the largest exporter of transport fuels in India,” Bernstein Research said in note, adding that transport fuels — gasoline, diesel and kerosene — account for 70% of the company’s product slate.

Factoring in the current product slate and fuel exports, Bernstein said it had reduced its estimates for Reliance’s gross refining margin from $25.50/b to $18.70/b for financial year ending March 2023.

Benchmark Platts FOB Singapore 10 ppm gasoil cargo averaged $176.80/b in June, up $23.36/b from an average of $153.44/b in May, S&P Global Commodity Insights data showed. Platts FOB Singapore 10 ppm sulfur gasoil derivative crack spread against Dubai crude swaps, a measure of the product’s relative strength to crude oil, breached $70/b for the first time at the Asian close June 21, S&P Global data showed. The crack spread has continued to hover at high levels as growing regional demand bolsters sentiment.

However, some analysts doubt if products cracks will remain at elevated levels for a long period.

“At the proposed rates, export taxes on petroleum products — diesel, gasoline and aviation turbine fuel — can result in another Indian rupees 650 billion-700 billion ($8.18 billion-$8.81 billion) of additional revenue for the government on an annualized basis,” said Sumit Pokharna, vice president at Kotak Securities. “However, we believe that current product cracks are extreme, and will likely correct.”

Strong appetite overseas

Recovering regional demand, as most countries in Asia-Pacific adopt an endemic stance to COVID-19, and a roll back of pandemic-related restrictions coupled with reduced outflows from China due to limited export quotas, have prompted other regional suppliers, including India, to beef up gasoil exports.

India’s gasoil exports rose 13.55% month on month and 3.84% on the year to 3.06 million mt, or 735,387 b/d, in May, according to the latest Petroleum Planning and Analysis Cell data. Gasoil exports over the first five months of the year stood at 14.11 million mt, up 14.46% on the year.

“As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market,” another oil ministry official said.

In an unprecedented move, state-owned refiners have recently issued a number of urgent buy tenders, seeking gasoil cargoes for prompt delivery between end-June and early July. The rare move to purchase was driven by a need to cover local shortfalls even through the country heads into monsoon season when downstream demand from the construction and transportation sectors normally remains subdued.

Domestic demand has been reportedly strong, prompting state refiners such as Indian Oil Corporation and Bharat Petroleum Corporation, to rush into importing additional barrels to replenish falling inventories.

“Monsoon season just started. So it will take time to dampen the demand,” a source at a state-owned refinery in India said. India’s monsoon season runs from June to September.
Source: Platts