The armed conflict between Russia and Ukraine led to a reduction in offtake of Russian crude and a consequent increase in crude oil and gas prices. ICRA notes that increasing oil prices add to the fiscal burden for the country, but it is a positive for upstream oil companies. Additionally, domestic gas prices notified at $2.9/mmBtu (GCV basis) for H2 FY2022 remain low and accordingly gas production remains a loss-making proposition for most of the Indian upstream producers. While domestic gas prices are expected to increase substantially in the next revision, the gas business of PSU upstream companies would turn profitable.

India’s commodity imports from Russia and Ukraine are less than 2%. Major commodities imported from other countries include oil, gold, metals and chemicals. With many countries imposing sanctions on Russia, prices of the said commodities are surging. Consequently, concerns over India’s growth and inflation projections are increasing. If this commodity price surge sustains for long, it might impact the Indian economy.

According to Prashant Vasisht, Vice President & Co-Group Head at ICRA: “A few countries including the United States have banned Russian oil and gas imports while some others are planning to phase these out over a period of time. With traders and refiners avoiding Russian oil, prices have jumped. While a possible Iranian nuclear deal could increase oil supply, it cannot entirely replace the loss of Russian oil as Iran is a much smaller oil producer than Russia. Prices of natural gas have also soared to all-time highs as Russia is a large producer of gas and supplies about one third of the gas requirement of Europe.”

The demand for petroleum products in the current fiscal has witnessed some recovery compared to the preceding fiscal but remains lower than the pre-Covid levels. Elevated crude prices may adversely impact the demand recovery witnessed in the recent months. The benchmark Singapore gross refining margin (GRM) has witnessed improvement in the recent months, however, high crude prices and subdued global demand may adversely impact the GRM. However, in the near term, there could be some inventory gains, which might aid the refinery GRMs. The retail prices of auto fuels are being increased in small amount. Graded price increases would prolong losses for the oil marketing companies.

Commenting on the impact on the gas utilities sector, Vasisht further added: “Elevated spot LNG prices have led to reduction in demand and lower capacity utilisations of all LNG terminals compared to the previous year. Increase in spot and term LNG prices is negative for new LNG terminals as demand growth is expected to remain muted, impacting volumes and the returns of these projects. Relatively higher spot LNG and term LNG prices will have a negative impact on city gas distribution companies as margins on PNG (I) & PNG (C) could be impacted.”