10.8 Crude oil · M10 Commodities

Motivation

India imports close to 90% of the crude it processes (PPAC's monthly Snapshot of India's Oil and Gas Data, https://ppac.gov.in, reports the import dependence; the September 2026 edition is image-only and the exact figure was not re-read for this course, so check the current edition). Crude is therefore the most important single price for the rupee, Indian inflation, the fiscal deficit, and a quarter of the Nifty's sectors. A trader in India who ignores crude is trading half-blind.

10.8.1Market structure#

Benchmarks

Brent (ICE futures; North Sea, waterborne): the global pricing benchmark. "Dated Brent" is the physical price for cargoes loading in a forward window.
WTI (NYMEX futures; delivered at Cushing, Oklahoma, a landlocked hub): the US benchmark. Physically settled.
Dubai/Oman: the Asian benchmarks for medium sour crude.
The Indian basket (published daily by PPAC, https://ppac.gov.in): a weighted average of the sour benchmark (Dubai/Oman) and the sweet benchmark (Dated Brent). The weights historically followed the sour/sweet mix processed by Indian refiners in the previous year, giving roughly three-quarters sour. In March 2026 PPAC moved to 61% Dated Brent and 39% Dubai/Oman, from about 79:21 sour-weighted, because India's sourcing (Russian barrels at about 35% of imports, plus African and American cargoes) had shifted to Brent-linked pricing (secondary news report, 13 Apr 2026; verify on PPAC). Under the old formula the basket had reached about $156/bbl during the Hormuz disruption, which the report says did not match procurement costs.

The Brent–WTI spread reflects transport cost from the US Gulf Coast and quality. When Cushing is congested, WTI trades at a deep discount (the 2011–13 episode, and April 2020 in the extreme).

Supply side

OPEC+: Saudi Arabia, Russia and allies coordinate output targets. A group of eight (later seven) countries made voluntary cuts from 2023, unwound them from April 2025, raised output monthly from April to September 2026, then paused. On 1 Nov 2026 the seven kept December 2026 targets at September levels; the next meeting is 29 Nov 2026 (OPEC press release, 1 Nov 2026). Spare capacity held by OPEC+ is the market's shock absorber.
US shale: short-cycle supply that responds to price within roughly 6–18 months; it can cap prices over that horizon but cannot replace a sudden loss of Gulf supply.
Strategic reserves: on 11 Mar 2026 the IEA ordered its largest-ever coordinated release, 400 mb, of which the US share was 172 mb over about 120 days; it covered only about 20 days of lost supply (IEA news release, 11 Mar 2026, https://www.iea.org/news/iea-member-countries-to-carry-out-largest-ever-oil-stock-release-amid-market-disruptions-from-middle-east-conflict/; the "20 days" comparison is from press coverage of the release, and iea.org refused automated access on 6 Nov 2026, so re-read the release before quoting it).

Demand side China is the largest importer and stockpiles opportunistically; India is the third-largest consumer.

Analytical frame: Kilian (2009) Not all oil shocks are alike. A supply shock (Hormuz) raises oil and hurts growth; an aggregate-demand shock (a global boom) raises oil and equities together; an oil-specific precautionary-demand shock (fear of future shortage) raises oil and inventories. The sign of the oil–equity correlation depends on which shock dominates. M12 uses this for event studies.

10.8.2Inventories and the EIA report#

The EIA Weekly Petroleum Status Report (https://www.eia.gov/petroleum/supply/weekly/) is released on Wednesdays at 10:30 ET: 8:00 PM IST during US daylight time and 9:00 PM IST in US winter time (so 9:00 PM IST from 2 Nov 2026), inside MCX trading hours. The American Petroleum Institute publishes an industry estimate the evening before. Traders compare the change in crude stocks, Cushing stocks, gasoline, distillates, refinery utilisation and implied demand with consensus. The 4 Nov 2026 report showed a crude draw of 0.865 mb against a forecast draw of 1.7 mb (the draw is in the EIA report's Table 1; the consensus figure is from an economic-calendar aggregator, secondary).

By Proposition 10.4, inventory surprises should move the spreads more than the flat price when stocks are low, and the flat price more than the spreads when stocks are ample. That is a testable prediction (Problem 13's extension; M12 event-study tools).

10.8.3Crack spreads#

Refiners buy crude and sell products. Their margin is proxied by crack spreads. The 3-2-1 crack assumes three barrels of crude yield two barrels of gasoline and one of distillate (diesel/heating oil):

\text{3-2-1 crack (\$/bbl)} = \frac{2P_{\text{gasoline}} + P_{\text{distillate}} - 3P_{\text{crude}}}{3}, \tag{10.20}

with NYMEX RBOB gasoline and ULSD (heating oil) quoted in $/gallon and converted at 42 gallons per barrel.

Worked exampleillustrative prices

WTI $80/bbl, RBOB $2.40/gal, ULSD $2.70/gal. Gasoline $= 2.40 \times 42 = \$100.80$ /bbl, distillate $= 2.70 \times 42 = \$113.40$ /bbl. Crack $= (201.60 + 113.40 - 240)/3 = \$25.00$ /bbl. A refiner can lock in this margin by buying 3 crude futures and selling 2 gasoline and 1 distillate futures per 3,000 barrels of throughput (NYMEX contracts are 1,000 bbl or 42,000 gal).

Indian relevance Singapore complex refining margins are the reference for Reliance and the state refiners' gross refining margins (GRMs). Diesel was the 2026 story: US diesel/gasoil prices topped $200/bbl, 94% above pre-war, in early September 2026 (as attributed to the IEA's September 2026 Oil Market Report; secondary, the report itself was not opened). A refiner benefits from wide cracks; an oil marketing company (OMC) with administered retail prices can lose on marketing even while gaining on refining.

10.8.4Term structure in 2026#

The 2026 Hormuz disruption produced steep backwardation, especially in physical and product markets: Dated Brent reached about $141.37 on 2 Apr 2026 while front-month futures were around $110–120 (Reuters report; secondary). Physical-price sources conflict: the EIA's Brent spot series gives $127.61 for 2 Apr and a 2026 high of $138.21 on 7 Apr (EIA series RBRTED, also FRED DCOILBRENTEU; M12 · 12.8, Case 6). The calculation below uses the dated-Brent figure; with the EIA figure of $127.61 the implied yield against a $120 one-month price is about 81% a year, still far above full carry. By (10.4), a one-month futures price of $120 against spot $141.37 with $r + u = 7\%$ implies a convenience yield of about 204% a year: the market was paying almost any price for barrels available now, because accessible prompt inventories had collapsed. This is Proposition 10.4(d) at the extreme left of the storage curve.

10.8.5India: import dependence and transmission#

The chain Brent up → import bill up and current-account deficit wider → rupee weaker → imported inflation → RBI more hawkish → foreign portfolio outflows → Nifty down. In 2026 each link fired: the rupee reached its weakest level on record, 96.82 per dollar on 20 May (Federal Reserve H.10 noon rate, FRED DEXINUS; M11 · 11.11); the RBI hiked the repo rate by 25 bp to 5.50% on 7 Oct 2026 and changed its stance to "calibrated tightening" (RBI, Resolution of the Monetary Policy Committee, 7 Oct 2026, https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=63742); FPIs sold heavily in March (NSDL FPI data as reported; M11 · 11.12).

Sensitivities (dated, sourced) The RBI's Monetary Policy Report of October 2025 estimated that a 10% rise in crude above its $70 baseline would add about 30 bp to inflation and reduce growth by about 15 bp, assuming full pass-through (reported by Business Today and others). An RBI staff study in the July 2025 Bulletin put the inflation effect at about 20 bp per 10% rise, and found that excise duty changes matter for the size. The October 2018 MPR estimated 13 bp direct plus further cost-push and currency effects. The numbers differ by method and pass-through assumption; use the range, not one point.

OMCs (IOC, BPCL, HPCL) Retail petrol and diesel prices are in principle market-linked but in practice sticky, so a crude spike causes marketing under-recoveries. In 2026 (all from press reports; secondary): Macquarie estimated peak losses of about ₹18/l on petrol and ₹35/l on diesel; excise was cut by ₹10/l in late March; pump prices were raised by about ₹7.35 (petrol) and ₹7.53 (diesel) in May; in September OMCs were still losing about ₹5/l on petrol and ₹23/l on diesel. OMC shares fall on crude spikes and rally on de-escalation (+3.4% on the mid-June framework news). Upstream producers (ONGC, Oil India) gain from high crude, subject to windfall taxes; airlines, paints, tyres and chemicals lose.

Practitioner notes

An OMC is short crude through marketing and long cracks through refining. Regress OMC returns on $\Delta\ln\text{Brent}$ and $\Delta\text{crack}$ separately; one beta does not describe it.
The government's response (excise cuts, pump-price decisions, windfall taxes) is part of the transmission. Model it as a policy reaction function, not noise.