India cannot afford to be indifferent to the global geopolitics over crude oil as it has set the stage for price spikes and high volatility.
In the current global oil politics being played by the US, New Delhi may end up losing two of its key oil suppliers — Venezuela and Iran.
For a country which is over 85 per cent dependent on imports to meet its crude oil requirements, India needs to work on its energy policy to ensure that commercial decisions are not determined by an outsider.
Though supply of crude oil will not be an immediate concern for India, price would definitely be a factor. Expensive crude oil will not only dent India’s forex reserves and, thereby, the country’s finances, but also push up retail fuel prices.
“India may have to pay a price if it stops importing oil from Iran completely. The economics of importing oil from Iran is more favourable than from other Gulf exporters. Simply put, Iranian oil is cheaper,” says Narendra Taneja, an energy expert.
The world market is about to lose up to 1.7 million barrels a day of Iranian crude and condensate with the end of the US’ six-month waivers on sanctions against the Islamic Republic’s oil and shipping sectors imposed last November, says the latest report of Vanda Insights.
During 2018-19, India imported about 227 million tonnes (87 per cent) of crude oil. Iran and Venezuela till April-December 2018 were the third and fourth largest suppliers, respectively, to India.
No new contracts
The domestic oil refineries such as Indian Oil Corporation and Mangalore Refinery and Petrochemicals have not signed any new contracts with Iran since the existing ones expired in April.
India, therefore, is set to lose a traditional supplier, which also offered good commercial terms — apart from being freight-free the country offered a line of credit for the purchases — that were almost 50-60 cents cheaper than what the rest offered.
The other producers in West Asia also charge a premium for the crude sold in the Asian market.
According to Vandana Hari, Founder and CEO of Vanda Insights, Iran’s oil supply is set to disappear with the end of the US sanction waivers, but Venezuela’s is limping along because of the political stalemate in the country.
The fact that despite the end of the waivers and concurrent outages in Russia, Libya and Nigeria, Brent has actually backed off its six-month high and receded towards $70 in recent days would come as a relief for India. But, for how long is the question.
Mukesh Ambani’s Reliance Industries was the key buyer of Venezuelan crude oil in India. Following the global turmoil, even Reliance has gone slow in its purchases and is looking at other destinations.
This leads to the question: Should commercial decisions be left to the companies or should the governments get involved? Taneja agrees that oil markets hate geopolitics-triggered anxieties. “Whatever President Trump may say, crude prices will remain massively volatile — moving northward more than southward — if the US pushes for 100 per cent ban on Iranian oil exports,” he avers.
While OPEC and non-OPEC producers may be able to cover the Iranian shortfall, their spare capacity will be stretched thin in the process. The big risk in the oil market now is the lack of spare capacity to plug any unforeseen, concurrent supply shortfalls from other major producers after Iran, say Vandana Hari.
“India has stepped up crude purchases from the US and IndianOil recently became the first from an Asian country to tie up a term deal for the same. Even though, the quality and the economics of US crude are different. The bulk of the Indian refiners’ crude slate is sour, the kind of crude Iran supplies,” she said.
Besides, US crude is also more expensive due to the higher freight cost and while volumes are rising, they are still constrained by the export infrastructure at US’ Gulf ports.
India definitely cannot live in the hope that rising crude prices would force the US to go lenient on the ban, letting Iran export some oil to international markets.
Alternative markets in West Asia, Africa, South East Asia and traditional partners like Russia need to be looked at.