How much can oil prices impact India's import bill in post-sanctions era?

There are compelling reasons for India not to worry too much about oil prices in the post-sanctions regime

To what extent would the US sanctions on Iran, disruptions in Venezuela and other controversial developments in the international crude oil market, such as the contamination of supplies from Russia to Europe (a well-cleaning chemical has entered the pipeline that could take months to clean up), impact India’s oil import bill? 

The unexpected answer is: Not much. That’s because India matters in the global politics of oil market as a purchaser, a heft it did not have earlier. First, it is buying far more and the rest of the world (especially Europe) is buying a lot less. India bought 226.6 million metric tonnes in 2018-19. Just 12 years ago, (2006-07) that figure was half at 111.5 tonnes. Among the world’s top five oil consumers, India now ranks third. The other four in sequence, are USA, China, Japan and Russia. Except for Japan, the other three are also mega-oil producers. Most oil producers except China (which accounts for 5 per cent of global oil production) need to sell it abroad. 

The second reason is that in a world facing an economic slowdown, the oil-producing countries in the Opec cartel need to sell oil to keep their economies in the black. In a global market in which prices of its principal competitor, lithium-ion batteries, which power electrical vehicles, have dropped 85 per cent since 2010, oil producers are unlikely to push prices too high. 

In a world market where investment in renewables even for transport, the mainstay of the market, has now become the norm than an exception, it is looking increasingly difficult to raise prices of oil. True, battery-powered electric cars account for only 2.1 per cent of the global vehicles market or about 2 million. That number could rise by another million in 2019 even as the broader auto market declines. There are optimists and pessimists about electric vehicles. Against a Bloomberg New Energy Finance report of 548 million sales of such vehicles by 2040, Exxon Mobil puts it at only 162 million. But the direction of mobility and the pressure on oil wells is clear either way. Hyundai has announced an investment of $6.7 billion to develop fuel cells. If Opec or Russia raises oil prices, the returns for Hyundai becomes even more attractive. Daimler Benz has plans to go fully electric by 2040.

Not surprisingly, then, India can make its displeasure on prices felt among the suppliers. Last week one of those suppliers, the Iranian foreign minister Javad Zarif landed in New Delhi to discuss oil in the light of the end of the US sanctions waiver for India. In May, the six-month grace period the US had given India and seven other countries to wind down their purchases of Iranian sulphur-heavy crude came to an end. President Trump said he will not extend the grace period, which means India has to find other sellers. One should expect this to raise prices. Indeed, prices are up over 4.5 per cent but — and this is the surprising part — the six-month futures price though rising are still lower than spot prices. Spot prices have risen because of the end of the sanctions. But future prices of oil are still down though the six-month Brent crude futures has moved to its highest level in over four years at $3.31; in respone se, spot prices should have corrected upward but it is below the 2018 peaks (see chart).  It is because of this combination that the oil futures market finds itself short of bullish territory. Traders expect oil inventories will be short later this year, but only if the US-China trade battle eases up. 

That is why oil producers are hunting for buyers. Closer home Zarif’s prompt visit, just days after the end of the US sanction waiver, was unusual. Iran has been in the sanctions crosshairs several times earlier. The latest of those was on December 31, 2011 when Washington DC imposed sanctions on the Central Bank of Iran as well as third-country banks if countries importing Iranian oil did not significantly reduce their imports within six months. India was immediately impacted. But Zarif’s first visit to India materialised only in February 2014. 

Between 2012 and 2014 to get around the sanctions India created an in-country escrow account in state-owned Uco Bank favouring the Iranian government to be able to pay for the sales in rupees. But Iran protested since the entire basis of the US-led sanctions was to cut its access to dollars. Tehran kept pressuring India to find ways to pay in dollars for the oil, and offered no cutback in the price. The pressure only ebbed somewhat once Mangalore Refinery and Petrochemicals, which imported about $12 billion of crude from Iran annually, began to cut back purchases because no insurance company was willing to give cover for the shipments. Since 2015, Zarif has visited India every year. 

And just like Iran, Saudi Arabia has made Aramco discover a lot of business interests in India. It has already offered an extra 2 million barrels every month to Indian Oil and plans to buy over 20 per cent stake in Reliance’s refining and petrochemicals business. It is also investing in state-run refineries at Bina and a greenfield project on the west coast. The rising investment contrasts with the stiff headwinds Saudi Aramco faces in both USA and Russia, its traditional dominant markets. Both countries are now huge energy exporter. How much can oil prices rise against Indian interests in this environment?