According to traders and shipping intelligence firm Kpler, estimates show that Indian buyers have reduced US crude purchases and have loaded up on Iranian oil just ahead of the Iran sanctions taking into effect next month. India and Iran established new diplomatic relations in 1950…
According to traders and shipping intelligence firm Kpler, estimates show that Indian buyers have reduced US crude purchases and have loaded up on Iranian oil just ahead of the Iran sanctions taking into effect next month.
Background
India and Iran established new diplomatic relations in 1950. During the Cold War, the two nations kept a studied distance due to India’s participation in the Non-Alignment Movement and Iran’s ties to the US. After the 1979 Iranian revolution, Iran’s relationship with Washington suffered, and relations between India and Iran strengthened momentarily. However, Iran’s continued support for Pakistan and India’s close ties with Iraq during the Iran–Iraq War impeded further development of Indo–Iranian relations. Iran is home to 7 million expatriate Indians.
Iran is one of the largest suppliers of oil to India. In 2011, the US$12 billion annual oil trade between India and Iran was impacted by extensive economic sanctions against Iran, forcing the Indian oil ministry to pay off the debt through a banking system through Turkey. The sanctions were a result of Iran’s nuclear programme, which has been a source of concern for the international community.
India is the second-largest buyer of Iranian oil and has imported an average of 577,000 barrels a day or about 27% of the Middle Eastern country’s exports.
Analysis
Data by traders and shipping intelligence firm Kpler show that US oil shipments to India have fallen to 84,000 barrels per day last month and the fear of nearing Iran sanctions have resulted in an increase in oil imports from Iran.
Kpler estimated that US oil imports were down by 75 per cent from a record high of 347,000 barrels per day and last month a U.S.-based trader said Indian buyers lifted purchases of Iranian crude to 502,000 bpd, up 111,000 bpd over August, in “a last gasp” of purchases “before sanctions actually hit.”
The rise in Iran oil exports can be attributed to an attempt made by Iran to hold on to its trading powers before the sanctions come into effect. They are providing oil at significantly cheap rates than its competitors along with offering extended credit terms and free shipping.
Stephen Brennock, an oil analyst at PVM Oil Associates in London, believes that though the Indian economy will face significant challenges due to the need to find new sources, it would be manageable for the country. “Indian refiners will face slightly higher input costs given that their access to attractively-priced Iranian crude will be limited. Even so, I don’t see this having a major impact on its broader economy,” he said.
On the one hand, analysts at CNBC tell that the oil prices remain at risk of rocketing toward $100 a barrel until the market gets clarity about the final drop in Iranian exports and the ability of oil producers to fill the gap. On the other, Saudi Energy Minister Khalid al-Falih said the kingdom was pumping near record levels and would raise output in November. Saudi Arabia is one of the few countries with the ability to significantly increase output.
However, Jeff Currie, global head of commodities research at Goldman Sachs told that “There’s a lot of uncertainty right now. We don’t have a clear picture of Iran.” He added, “If you have a sustainable loss in Iran, $90 to $100 is a potential outcome here, but we don’t know at this point what’s going to happen to Iran.”
Counterpoint
The biggest concern for India is despite being the world’s third largest oil importer and the second largest buyer of Iranian crude oil after China, complying with the sanctions will require for India look at other sources which would be at higher costs.
Though the US recognises India’s concern and its dependence to satisfy the oil demand, there are doubts as to whether the temporary waiver from the US instead of slowly reducing their supplies from Iran will be put forth.
Assessment
Our assessment is that the Iranian exports could fall below 1 million bpd in November and global spare capacity is dwindling to the lowest level in recent times. We feel that only China and Turkey may be willing to risk US retaliation by transacting with Iran.
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