Officials in state run oil marketing companies said that with demand for petroleum products, primarily petrol and diesel, shrinking by almost 60 per cent in the first half of April on COVID-19 related lockdown and projections that overall product demand will be over 30 per cent lower in the first quarter of FY21, they were left with no option to cut production with refinery run almost dipping by 50 per cent now.
To add to the problem is almost full storage capacity at fuel stations and at sites created by refiners. Analysts estimate that almost entire 85 million barrel storage capacity with the state-run companies is full. This means that if the production continues at normal pace, products would either have to be disposed off to whosoever wants it at whatever prices or stored at floating or leased storage abroad at high cost.
"We are in similar position to what led to collapse of WTI crude by more than 300 per cent to negative $ - 37 a barrel on Monday. Since that price is not an option with us, the only thing that can be done is to cut production, which has already started at several of the refineries," said the official of the oil company quoted earlier.
On Monday US crude, West Texas Intermediary (WTI), reached historic low levels plummeting to negative levels for the very first time on future contracts with May delivery. As the contracts were expiring on Tuesday and traders with long positions facing the prospect of taking actual delivery of crude when no storage was available, were actually willing to pay to dispose off oil at whatever cost.
With large portion of Indian oil Market dominated by government owned companies, such speculative trading is not possible here, but situation on the ground has lots of similarities, analysts said.
Overflowing storage have forced Indian refiners to sell very prompt cargoes of oil products with some tenders offering loadings in about a week, compared with normal loading range of a three-four weeks ahead.
Even private refiners such as Reliance Industries, as per analyst reports, is looking to send product cargoes to leased storage outside India.
At the fuel pump level, out of 66,000 stations in the country, most are not reordering petrol and diesel and there storage are also reporting full, the situation is grim is metros like Mumbai, Delhi, Kolkata where lockdown and increasing number of coronavirus has completely stopped public transportation and resultant a sharp fall in demand for fuel.
A Platts blog report has also indicated that even the size of India's strategic oil reserve is not big enough to absorb the current shock in the oil market and the current crisis has become a loss of opportunity for the country that could have otherwise stirred cheap oil in large quantities in reserves.
India's strategic oil reserve of 5.33 million tonnes or 39 million barrels of oil is almost half full now. And with the situation developing in demand front, a lot of crude from state-run oil companies can make its way there rather than cheap oil from across the globe.