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Whereas the latest oil price rally comes as a boon for long-suffering oil bulls, countries that rely heavily on Middle Eastern energy imports are by no means celebrating.
In August, the Middle East accounted for 44.6% of India’s crude imports, up from 40.3% in July.
A blockade of the Strait of Hormuz would be particularly alarming for India since it’s the route it uses to get oil from Iraq and Saudi Arabia and LNG from Qatar.
The oil price rally continued on Friday, adding to Thursday’s big jump after the Middle East crisis took a turn for the worse. Crude oil futures surged as much as 5% in Thursday’s session after President Biden said his administration would support Israel striking Iran’s oil facilities, adding that the option is being discussed. Brent crude for November delivery gained 2.0% in Friday’s session to trade at $79.12 per barrel at 13.20 pm ET while WTI crude was changing hands at $75.38 per barrel after gaining 2.3%. Clearview Energy Partners has predicted that oil prices could gain as much as $28/bbl if flows are blocked in the Strait of Hormuz; $13/bbl if Israel strikes Iranian energy infrastructure and $7/bbl if the U.S. and its allies placed economic sanctions on Iran.
Hormuz is the world’s most important oil transit choke point. Choke points are narrow channels along widely used global sea routes that are critical to global energy security. Even temporary disruptions that occur along these critical routes can lead to substantial increase in shipping costs, increasing world energy prices. Located between Oman and Iran, Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea.
Whereas the latest oil price rally comes as a boon for long-suffering oil bulls, countries that rely heavily on Middle Eastern energy imports are by no means celebrating. One such country is India. Whereas a lot of focus lately has been on India’s surging imports of Russian oil, the country actually buys the lion’s share of its oil from the Middle East. In August, the Middle East accounted for 44.6% of India’s crude imports, up from 40.3% in July. Iraq, Saudi Arabia, the UAE, and Kuwait are the main Middle Eastern suppliers of oil to India. In contrast, the share of Russian crude fell to 36% after five straight months of increases.
Meanwhile, India imports nearly half of its liquefied natural gas (LNG) from Qatar. Back in February, India’s Petronet LNG (PLL) and QatarEnergy inked a long-term LNG Sale & Purchase Agreement (SPA) for the supply of around 7.5 million metric tons per annum (MMTPA) of LNG to India over the next 20 years. The deal involves LNG imports of $78 billion by the PLL during the contract period
Important oil shipping routes such as the Red Sea and the Strait of Hormuz can be disrupted by a full-scale war. A blockade of the Strait of Hormuz would be particularly alarming for India since it’s the route it uses to get oil from Iraq and Saudi Arabia and LNG from Qatar. Further, India’s economy would definitely take a hit if oil and gas from the Middle East are cut off. An oil price shock would likely force the government to divert funds from activities such as building infrastructure to spend on heavier fuel subsidies. According to a Morgan Stanley report, every $10 per barrel increase in oil prices could result in a 0.5-percentage point increase in India’s Consumer Price Index (CPI)
More Russian Oil
There’s a strong likelihood that India will resort to buying even more Russian energy commodities if the situation in the Middle East becomes untenable. Back in July, India became the world’s biggest importer of Russian oil, surpassing China. Data on Indian shipments from trade and industry showed that the country imported 2.07 million barrels per day (bpd) of Russian crude in July, good for a 4.2% M/M and 12% Y/Y increase. That exceeded China’s July oil imports 1.76 million bpd via pipelines and shipments, based on Chinese customs data.
Indian refiners have been buying Russian crude at a discount to Brent ever since Western nations curtailed imports of Russian energy commodities following its invasion of Ukraine. India’s purchase of Russian ESPO Blend crude jumped in July to 188,000 bpd as larger Suezmax vessels were used. Refiners in northeast China are typically the biggest ESPO buyers thanks to their close proximity to Russia; however, they are now buying less due to tepid fuel demand.
“India’s requirement for Russian oil is going to go up as long as there are no further tightening of sanctions,” an Indian refining source told Reuters.
But, there’s a catch: India imports oil from Russia through the Red Sea, meaning disruptions here would force the country to rely on the longer–and more expensive–route via the Cape of Good Hope to avoid attacks
It’s also likely that the country will now accelerate the development of its domestic oil and gas resources. Four largely unexplored sedimentary basins in India could hold up to 22 billion barrels of oil, S&P Global Commodity Insights has reported. In effect, lesser-known Category-II and III basins namely Mahanadi, Andaman Sea, Bengal, and Kerala-Konkan contain more oil than the Permian Basin which has already produced 14 billion of its 34 billion barrels of recoverable oil reserves.
Rahul Chauhan, an upstream analyst at Commodity Insights, has emphasized the potential of India’s unexplored Oil & Gas sector, “ONGC and Oil India hold acreages in the Andaman waters under the Open Acreage Licensing Program (OALP) and have planned a few significant projects. However, India still awaits the entry of an international oil company with deepwater and ultra-deepwater exploration expertise to participate in current and upcoming OALP bidding rounds and explore these frontier regions,” he has declared.
Currently, only 10% of India’s 3.36 million sq km wide sedimentary basin is under exploration. However, Petroleum Minister Hardeep Singh Puri says that the figure will jump to 16% in 2024 following the award of blocks under the Open Acreage Licensing Policy (OALP) rounds. So far, OALP has seen the awarding of 144 blocks covering about 244,007 sq km.
By Alex Kimani for Oilprice.com
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