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Why is India Trying to Cut Crude Oil Imports from the Middle East?

Editor, TRANSFIN.
Mar 26, 2021 4:40 AM 4 min read
Editorial

India’s state-owned oil marketing companies (OMCs) are currently in a state of flux.

The Government has asked them to find ways to diversify their source of crude imports as a way to cut their reliance on the Middle East (in particular, Saudi Arabia)

As a result, local processors have amped up imports from the US. Shipments from Guyana and Brazil have also been booked for the first time. And oil minister Dharmendra Pradhan has asked companies to look at Africa as an alternative to the Middle East, the latter of which for long has been the country’s traditional supplier.

What Sparked This?

This crusade for diversification has always been on the Government’s agenda, but it received a boost due to New Delhi's irritation over Riyadh's "hard stance" on production cuts.

The COVID-19 pandemic decimated oil demand and hence prices. Brent crude fell below $20 per barrel last year. WTI even went negative.

To prop up prices, OPEC+, a group of 23 oil-producing nations, cut production levels. Over time, as economies reopened and demand resurfaced, oil prices climbed higher and retouched pre-pandemic levels. Naturally, importers expected production curbs to be lifted now that recovery was on the horizon. But earlier this month, the oil cartel decided to extend cuts through April.

“I will believe in (the market recovery) when I see it," the Saudi energy minister said. (The petrostate had pledged in January to even cut its production by an extra 1 million barrels per day.)

This obviously irked importers. Especially India, which imports over 80% of its crude needs. Prolonged production cuts mean an increase in the import bill and also a jump in retail crude oil prices. (Recently, the price of petrol even crossed ₹100 ($1.37) per litre in some parts of the country.) All this is particularly bad for a pandemic-battered economy that barely escaped the first recession in its modern history.

 

Oil Be Damned

India’s oil dependency is one of its most unfortunate Achilles heels. Lack of major local sources has meant that the country imports four-fifths of its crude needs. And exploding demand has meant a steeply rising import bill.

The cost is not merely monetary. The diplomatic nuances surrounding oil have left the Indian economy at the mercy of the vagaries of international politics. Terrorist attacks on Aramco facilities, US sanctions on Iran, blockages at chokepoints, European backlash against Russia - all of these eventually affect the Indian Government’s coffers. Not “Atma Nirbhar” at all!

To reduce its addiction to imports of the black gold, the Government has invested in local exploration and expanded its renewable energy footprint and indigenous ethanol fuel production. However, with the second-largest population and dreams of becoming a $5trn economy, it’s nearly impossible for India to quit crude. (Sort of like why coal is still so important for the Indian economy.)

 

Arabian Frights

India’s oil industry is guilty of a heavy concentration risk when it comes to source of imports. Nearly 62% of crude purchases in April 2020 - February 2021 came from one region alone - the Middle East.

There’s risk involved from an organisational standpoint too: Around 86% of oil imports to India last year were from OPEC+ members, with 19% being bought from Saudi alone.

 

These numbers make the world’s third-largest oil importer susceptible to the oil group’s dictations. And to the happenings of the Middle East, which isn’t particularly renowned for political stability.

 

Long Time Coming

To be fair, diversification plans were afoot even before the Government’s concerns over OPEC+ production cuts fell on deaf ears.

In February, the US replaced Saudi as India's second-largest oil importer. Purchases from the world's largest producer jumped 48% MoM even as imports from Saudi plunged 42% to a decadal low, relegating the Kingdom to #4 for the first time in over 15 years. (Iraq continued to be India's top seller, despite a 23% decline in purchases.)

OPEC’s production cuts and the pandemic have benefited some producers. Like the US and Nigeria, whose crude output contains more gasoline, which is in high demand partly because the coronavirus has pushed consumers to opt for private vehicles over public transport. (This stems from the fact that crude from these geographies carries much lower sulfur, which is anyways viewed as being much more desirable.) It also doesn’t hurt that China’s reluctance to buy US oil amid trade tensions means Washington has an alternative buyer in New Delhi.

FYI: The pandemic has also benefited some countries’ oil import needs. China had been on an oil buying spree for most of 2020, making the most of record low prices and stockpiling crude in its tank operators, refineries - and at sea. India, with storage facilities at Mangalore, Padur and Vishakapatnam, also went on a cheap oil buying binge to bag a big bargain and save a killing. But its shopping spree was not as elaborate as China’s, whose storage facilities are far more extensive and advanced.

 

Unity in Diversification

For India, diversification of oil imports has always been a matter of when and not how. Its advanced refinery facilities allow the country to process any kind of crude, giving it some leeway over who to import what from.

For OMCs, the US is an obvious choice for bookings. The two countries have a blossoming diplomatic relationship and are tied at the hip in many other areas already. Recent discoveries off the Guyanese coast and oil explorations in Brazil give these companies even more options.

But the Americas are oceans away and separated by numerous sensitive chokepoints. Which is why the Government has touted Africa. The second-largest continent currently contributes to only 15% of India’s oil needs, but its share is steadily rising. In recent years, India has begun making oil purchases from Cameroon, Chad, Ghana and Côte d’Ivoire. Nigeria, Angola, Algeria, Egypt and Equatorial Guinea are already well-established sellers.

All said, don’t expect Saudi oil imports to plunge too drastically in the near-term. The Kingdom is too geographically close and India’s thirst for oil is too insatiable for that to happen. India might quit crude before it quits Middle Eastern crude imports!

FIN.
 

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