China has just stopped exporting fuel, and India is already experiencing the effects of this
China has put a temporary halt to its exports of refined fuel for the month of October in order to safeguard its domestic stockpiles. Although India is not one of China’s largest direct customers for fuel, the decision is already having an impact on global oil prices, India’s currency, its bonds and the country’s internal fuel economics.
China has effectively eliminated another major source of refined fuel from a global market which is already under a great deal of pressure. In October Chinese refiners halted their exports of oil products to destinations other than Hong Kong and Macau as the Beijing authorities concentrate on restoring their domestic stockpiles. PetroChina cancelled a number of shipments of gasoline and jet fuel, and the other refiners also withheld their deliveries while they waited for new export instructions from the government. Reuters
India has no need to import large amounts of Chinese diesel directly since that decision would still have an impact. Fuel is traded on a global scale; if the supply from Asia is taken away, then the buyers have to compete more fiercely for the remaining quantities. This in turn leads to higher refining margins and increased energy prices throughout the region, until even countries which had not originally anticipated buying the missing Chinese barrels do so.
The transmission was extremely fast. Following China’s decision to suspend exports of refined products, the price of Brent crude rose back above $100 per barrel. On that day the Indian rupee dropped by 0.5 per cent to 96.3150 against the dollar, reaching its lowest level in two months. Mumbai stocks fell by about 1 per cent and the yield on India’s 10-year government bond reached its highest point in more than two years. Reuters
The situation was not the result of action taken by China alone; at the same time the yields of U.S. Treasury securities were rising, foreign investors were already withdrawing their funds from Indian assets, and global fuel supplies had already been affected by the disruptions in the Middle East and Russia. But China has just taken out another pressure valve.
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China’s decision is important since the world is not anymore facing a simple shortage of crude oil; the issue has instead become more focused on refined products, especially diesel, gasoline and jet fuel.
China possesses the greatest refining capacity in the world, even though its exports of fuel are generally less than those of India and South Korea among the major Asian refiners. Earlier this year Beijing cut back on its exports since the Iran war had disrupted the supply of crude oil from the Middle East, lifted some of these restrictions during the summer, and has now re-imposed them because domestic stocks are still below the levels that are desired. Reuters
Zameer Yusof, senior manager of clean oil products at Kpler, said to Reuters that China’s commercial stocks of gasoil and diesel were about 20 million barrels below the level that Beijing desired before exports could be normalized, and its gasoline stocks were around 9 million barrels below what was desired. Reuters
The market responded almost immediately. The expectation of reduced Chinese exports caused Asian gasoline refining margins to reach a record high of more than $50 per barrel above Brent crude. Although Singapore, Malaysia and Australia are some of the countries most directly affected by Chinese fuel shipments, the higher prices do not stay within those countries. Reuters
When it comes to gasoline or diesel, traders in other places will see the same chance. The cargo will then be directed to the highest bidder. Prices will go up in nearby markets. Refiners who usually supply India might discover more profitable buyers elsewhere. A Chinese export restriction can in the end become an inflation problem in India.
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India is very sensitive to worldwide energy shocks since oil which it imports affects almost every part of its economy; an increase in oil prices can cause the rupee to weaken, raise transport costs, increase business expenses and in the end lead to higher inflation.
The Indian finance ministry itself is currently cautions regarding precisely that issue. In its September Monthly Economic Review it stated that high crude oil prices, geopolitical tensions and tighter global financial conditions could lead to higher imported inflation and pose risks to the rupee and capital flows. Retail inflation had climbed to 4.82% in August, while wholesale inflation hit 9.92%, partly due to renewed pressures relating to fuel and power. Reuters
The currency has a worsening effect on the problem. Oil is usually priced in dollars. If the rupee declines, Indian companies will need more rupees to buy each barrel of oil even if the dollar price remains the same. When both of these things occur at the same time, when the price of oil is rising and the rupee is weakening, the effect is multiplied.
The pressure is already being observed at fuel stations in India. India has maintained the prices of retail diesel and gasoline since May even though global oil prices have risen. In response, the private refiners Reliance Industries and Nayara Energy limited the amount of fuel they sold at certain service stations in order to cut their losses. On October 1 the Oil Secretary, Neeraj Mittal, stated that the government would instruct the private fuel companies to cease rationing the sale of fuel. Reuters
Mittal stated, “Nobody is allowed to cap fuel sales.” According to company officials speaking to Reuters, the state-owned fuel retailers are currently suffering a loss of approximately 50 rupees per litre on diesel as a result of the present pricing system. ReutersThat presents an unpleasant dilemma: either the fuel retailers have to take huge losses, fuel prices end up rising, or the government has to take more aggressive action. None of the alternatives is free from pain.
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There is a significant reason why one should not overstate China’s role. India is not one of the major destinations for China’s exports of refined fuel. Singapore, Malaysia, Australia, Vietnam, Bangladesh and the Philippines have been the more substantial buyers. China’s action is therefore not equivalent to Beijing switching off a pipeline that runs directly into India. Reuters
India is experiencing the effects of China’s decision via the global pricing system, together with a number of other shocks. At about the same time, U.S. ten-year Treasury yields rose to 5.34 per cent, the highest they have been since 2002. Higher American yields make investments in emerging markets less attractive and can cause capital to flow away from India. Furthermore, disruptions in the supply of Russia and in the Middle East have also reduced the amount of refined fuel available on a global basis. Reuters
There is now a significant opposing force. On Friday the Group of Seven agreed to coordinate the release of 100 million barrels of diesel and crude oil from its emergency stockpiles, with the action to start right away and last for four months. The aim of this step is to alleviate the pressure caused by strained refining capacity, war-related disruptions and export restrictions. Reuters
Oil prices reacted. Brent closed on Friday at $102.25 per barrel, with a slight decrease, and West Texas Intermediate dropped to $91.11. Ole Hansen, a commodity strategist at Saxo Bank, stated that the main concern is now refined-product supply rather than the availability of crude oil. Reuters
The fact that there is such a distinction is important for India. If emergency releases, the restoration of Middle Eastern oil flows and increased refinery output restore balance to the diesel and petrol markets, the shock might turn out to be temporary. The rupee could then stabilise, fuel sector losses could decrease and the pressure on Indian inflation could be reduced. If they don’t, then China’s decision becomes a great deal more important.
The priority is to look after its own consumers and inventories. Michal Meidan, head of China energy research at the Oxford Institute for Energy Studies, made it clear: “International markets are an afterthought.” ReutersIt might be a rational policy for China. It serves as a warning for India.
A nation doesn’t have to purchase its fuel directly from China in order to experience what takes place when the world’s largest refining centre decides that it is more important to keep barrels at home than to sell them abroad.By China the global fuel market has had one door closed and India is now realising how fast pressure can spread through another.