Refinery Pain: Physical Crude Prices Outpace Futures Market Rates

India's oil refineries are facing stiff competition as physical crude prices surge ahead of futures market rates. According to industry executives, the Brent spot price averaged $12 a barrel above November Brent futures prices between September 1 and 22. This gap widened to as much as $22 on September 15, with spot prices exceeding futures rates by over $15 in several instances during this period.

The physical market is experiencing tightness due to constrained Gulf supplies. Suppliers are demanding premiums of up to $20 a barrel above futures prices, which does not reflect the current conditions in the physical market. The November Brent futures price is typically used as a benchmark for crude purchases, but it may not accurately represent the actual cost of crude.

The final price of crude purchased by refiners also takes into account differentials for specific grades and contractual terms. This means that higher physical-market prices directly impact refiners' procurement costs, even if futures prices are lower. Crude purchase deals are usually agreed upon two months before delivery, with the actual price determined by the physical-market benchmark averaged over the loading month.