How US sanctions on Russian oil export will impact Indian oil companies? Yogesh Patil explains

Yogesh Patil, V-P, Dolat Capital, says Long-term contracts won't be affected by crude sourcing agreements with Russia, but spot purchases of Russian oil, which account for 40-45% of India's imports, will be impacted. Discounts on Russian crude were about $3 per barrel recently, but Indian refiners will now need to source oil from the Middle East without discounts, affecting their gross refining margins. Currently, petrol, diesel, and LPG prices are somewhat frozen, preventing companies from passing increased crude costs to consumers, leading to challenges for OMCs amid rising prices. On a positive note, ONGC and Oil India are expected to report strong results due to a weakening rupee, rising oil prices, and the removal of the windfall gain tax. However, ONGC's stock fell on Monday, likely due to concerns over its investments in Russian assets.

How major could be the impact of the new sanctions by the US on Russian oil on global crude oil prices? Where do you see oil prices headed globally?
Yogesh Patil: On Friday evening, the Biden administration imposed sanctions on the Russian export oil supply chain and two major oil companies including Gazprom Neft Gas, which are involved in export of closer to one million barrels per day oil on a daily basis. Secondly, they have sanctioned closer to 180 vessels, which are exporting the oil to different nations and lastly on some insurance companies.

So, the sanctions are on the whole of oil export supply chains from the Russian side. How is it going to impact mostly the Indian refiners? There are two types of contracts there. A few companies have already entered into long-term contracts. We do not expect any kind of impact on the long-term crude sourcing contracts from Russia, that is one thing.

Second, the spot purchases of Russian oil will definitely be impacted. Russian oil accounts for 40-45% India’s oil import and so that will be impacted. One needs to note down that the discounts which we are getting on the Russian crude purchases were closer to $3 per barrel as per the ministry data in October-November. Now, Indian refiners and the oil marketing companies need to start looking for the fresh oil, which will be mostly from the Middle East and which will not be available at a discount. That will impact the gross refining margins of oil marketing companies.

Second, already the petrol, diesel, and the LPG prices are indirectly frozen at some levels, So, these OMCs will not be able to pass on the higher cost of crude prices to the Indian consumers. So there will be a hit on the higher crude prices. Apart from that, ONGC and Oil India should report a healthy set of numbers considering the Indian rupee is depreciating, the oil prices are rising and India or the government has already removed the windfall gain tax on that side. So, it is positive for ONGC and Oil India.

But on Monday, ONGC reacted negatively mainly because we believe there are some assets or fields where ONGC has invested in Russia. Three fields are there and the three fields contribute closer to 10-11% to the overall ONGC's production. Out of these three fields, one of the fields, like Sakhalin, which is an export-oriented field, because of these sanctions on Russian oil exports, could get a little bit hurt or negativity can be built up and so we ONGC could be reacting negatively.

Last week, the prices of Brent crude and WTI moved up 6 odd percent. If the prices are to remain elevated, does that bring the inflationary concerns back on the table? If yes, then what is going to be the stance for RBI as far as rate cuts are concerned?
Yogesh Patil: Our strategy team will take a call on this side. But considering higher oil prices, the raw material prices and the transportation costs for these companies will definitely increase. That is my view on the RBI policy whether they take a call on rate cuts or not. So, our strategy team will get back on this side.

You were just helping us understand why ONGC is reacting negatively. Is there any other company with exposure to Russia that can be impacted negatively? We understand that for OMCs, the margin could be under pressure.
Yogesh Patil: Coming back to Russian assets, ONGC and Oil India have oil and gas producing assets in Russia. Looking into these assets, one needs to look whether these are oil exporting assets or are producing oil which will be consumed inside Russia. That bifurcation gives us an idea because the sanctions are on the Russian oil exports. There are no sanctions on the domestic oil production as of now. We believe some kind of negativity will build up if these assets are completely export-oriented assets.

Coming back to OMCs, definitely the impact of every dollar per barrel increase in oil prices on the gross marketing margins will be closer to 55 paise per litre, In addition, the INR depreciation versus the USD is also impacting on the gross marketing margins of these companies. Overall, a negative scenario is getting built up for the oil marketing companies in the short run.