West African Oil Rally Threatens Indian Growth: Energy Markets

The highest prices for West African crude in more than two years are threatening to dent economic growth in India while boosting revenue for suppliers in Nigeria and Angola.

Nigerian Bonny Light crude has risen $10 a barrel, or 9.3 percent, since Feb. 16, when political unrest in Libya cut supplies of similar quality crude, outpacing the 8.5 percent gain in London’s Brent oil. A $10 increase in oil prices may cut India’s economic growth by 0.2 percentage point, according to Goldman Sachs Group Inc. Bonny Light’s official selling price was $3.40 above Brent in April, the highest since November 2008.

Refiners are turning to Nigerian and Angolan crudes as fighting in Libya cuts the supply of lower-sulfur, “sweet” crude, which is more easily refined into cleaner-burning fuel. Indian Oil Corp. and Bharat Petroleum Corp. will buy 15 percent of West African crude exports this year, down from 12 percent in 2010, according to Vienna-based JBC Energy GmbH. Profit at Royal Dutch Shell Plc (RDSA), operator of Nigeria’s largest oil fields, rose 30 percent in the first quarter as prices climbed.

“India’s import bill is on the way up,” said Praveen Kumar, the Singapore-based head of South Asia oil and gas at FACTS Global Energy, an industry researcher. “Indian refiners can either buy West African crude or Middle Eastern crude, and they have maxed out on how much Middle East oil they can buy. It’s expensive, but they have no choice.”

Refinery Setup

The rally in prices is hurting India, the world’s second fastest-growing major economy behind China, because it can’t diversify its crude supplies, according to FACTS. Indian refiners typically set up plants to process light, sweet crude grades because they yield the best quality of automobile fuel.

Refiners are seeking to raise gasoline output to meet an increase in demand as vehicle and fuel use surges with rising incomes. India’s benchmark wholesale-price inflation accelerated to almost 9 percent in March, exceeding the central bank’s 8 percent estimate. The economy may expand “around 8 percent” in the 12 months through March from 8.6 percent the previous year, central bank Governor Duvvuri Subbarao said on May 4.

India may buy 38 percent of all West African crude supplied to Asia in May, up 10 percentage points from a year earlier, said David Wech, head of energy studies at JBC Energy GmbH. The country will import 17.4 million barrels from the region this month, according to a Bloomberg News survey of five traders, up from 17 million barrels in April.

Goldman Sachs

A cargo of Bonny Light crude cost $115.86 a barrel yesterday, according to data compiled by Bloomberg. Prices have climbed $19.5 a barrel, or 20 percent, this year. Dated Brent, the marker price for West African oil, was at $112.47 a barrel and has advanced $18, or 19 percent, in 2011.

In addition to denting India’s economic growth, an increase of $10 in oil prices may raise the country’s current account deficit by 0.4 percentage point and fiscal deficit by 0.2 percentage point, Goldman Sachs said in an April 21 report.

Refiners processing Bonny Light crude in Singapore, a benchmark indicator for Asia, were making a loss of $2.78 a barrel May 10, according to data compiled by Bloomberg. That compares with a gain of $1.48 for North Sea Brent oil and a profit of $3.74 for Saudi Arabia’s Arab Light.

Refiner Losses

Losses at India’s state-run refiners are being exacerbated because they sell most fuels at prices set by the government below market rates to curb prices in a country where 66 percent of the population lives on less than $2 a day. Processors are losing about 5 billion rupees ($112 million) a day selling fuels such as diesel and kerosene below cost, according to data from the petroleum ministry.

The government compensates state refiners for selling fuels below cost, increasing the burden on the fiscal budget, said Jagdish Meghnani, a Mumbai-based oil and gas analyst at Alchemy Share & Stock Brokers.

“State-run refiners are making huge losses by selling below cost, they are nowhere near international refining margins,” he said. “Ultimately, the government will have to raise prices and make consumers pay for it.”

While the rising cost of crude has capped the shares of Indian companies, rival refiners that can switch more easily to different grades of oil have gained. Bharat Petroleum shares gained 0.8 percent this year in Mumbai, while Indian Oil’s advanced 2.2 percent. Valero Corp., the biggest independent refiner in the U.S., rose 14 percent. SK Innovation Co., South Korea’s largest processor, climbed 12 percent.

Gasoline Costs

India may increase gasoline costs by 2.5 rupees a liter, Bloomberg UTV reported May 10, citing oil ministry sources it didn’t identify. The ministry has recommended raising diesel prices too, according to the report. Indian Oil currently sells gasoline for 58.37 rupees a liter and diesel for 37.75 rupees a liter in New Delhi, according to the company’s website.

Libyan crude output, which last year averaged 1.6 million barrels a day, tumbled to 285,000 barrels a day in April, according to a Bloomberg News survey. Crude oil production in Libya accounts for 8.8 percent of global low-sulfur, or sweet, crude output, according to JBC Energy.

“West African grades are some of the best replacements” for Libyan crude, Wech said.

Nigeria, Africa’s largest producer, pumped 1.9 million barrels a day in April. Shell, Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Total SA (FP) and Eni SpA (ENI) run joint ventures with state-owned Nigerian National Petroleum Corp. that produce about 90 percent of the country’s oil. Angola was the second-biggest, producing 1.6 million barrels a day.

Shell earned $6.3 billion in the first quarter, excluding one-time items and inventory changes compared with $4.8 billion a year earlier. The company’s shares rose 4.6 percent this year.

To contact the reporters on this story: Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net; Sherry Su in London at lsu23@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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