Even as oil prices soared on Monday following the drone attack at Saudi Arabia’s fuel-producing infrastructure at Abqaia and Khurais over the weekend, the Indian government said the country was insulated from any supply shortage.
Oil prices surged the most on record on Monday, with Brent crude oil rising by as much as 19.5 per cent to $71.95 per barrel — the biggest gain in dollar terms since futures started trading in 1988. It later came down to $67.7 per barrel. US West Texas Intermediate (WTI) futures climbed 15.5 per cent to $63.34, the biggest intra-day percentage gain since June 1998. Increasing dependence on Saudi Arabia for crude supply, as India cuts imports from Iran, could be cause for concern.
“Following the attacks on the oil stabilisation centres of Saudi Aramco, top executives of Aramco have been contacted. We have reviewed our overall crude oil supplies for... September with our OMCs (oil-marketing companies),” tweeted Oil Minister Dharmendra Pradhan on Monday. “We are confident there would be no supply disruption to India. We are closely monitoring the evolving situation.”
The attack has knocked out over half of Saudi Arabia’s production as it cut 5.7 million barrels per day or over 5 per cent of the world’s supply. India imports 83 per cent of its oil needs. Saudi Arabia is its second-biggest supplier, providing 40.3 metric tonnes (MT), after Iraq (46.6 MT). Iran is the third-biggest supplier, with 23.9 MT of oil.
“We have already stopped imports from Iran. Any long-term supply issues or a global crude oil price increase may have an adverse impact on our gross refining margins. However, the impact on subsidy is likely to be minimal as only LPG (liquefied petroleum gas) and kerosene are under subsidy now,” said A K Sharma, former director (finance), Indian Oil Corporation (IOC).
Analysts at Jefferies, too, share the same view and suggest the rise in oil prices will be another macro headwind.
“Replacing Saudi barrels that made up a fifth of imports in the last few years would be a challenge. A $10 rise in Brent will lift the annualised import bill by $15 billion or about 50 basis point (bps) of gross domestic product,” said Somshankar Sinha, managing director and head of equity research for India at Jefferies in a note. This is likely to put pressure on marketing earnings and refining margins of oil-marketing companies — IOC, Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL). “Supply is unlikely to be an issue, but companies will be in a spot only if prices go beyond $70 a barrel, as market sentiments will be affected,” said a senior HPCL official.
In a meeting with Indian embassy officials in Riyadh, the Saudi oil ministry assured seamless supply. Some industry insiders, however, said even if Saudi supplies were disrupted for three months, higher inventories by the Organization for Economic Co-operation and Development (OECD) countries could fill in the gap. The International Energy Agency’s estimates suggest the OECD countries have 2.93 billion barrels of commercial petroleum inventories, including 1.09 billion barrels of crude oil inventory and 1.55 billion barrels of strategic government-controlled petroleum reserves.
US President Donald Trump announced the release of oil from the US SPR, which the market was perhaps expecting, given that the spike of 20 per cent had moderated. Besides, Saudi Arabia, too, has substantial inventories to make up for the shortfall.
State-owned Saudi Aramco has 66 million barrels of storage capacity (or about ten days of the disruption) at its four crude export terminals, reports suggest, and may hold even more at other domestic and international hubs. On the other hand, a possible release of more oil from the strategic petroleum reserves (SPR) to cap the prices is also not ruled out.
“They (Saudi Arabia) have said they will continue to supply from these inventories. However, clarity has to come on how much time it will take for this production to be back to normal,” said M K Surana, chairman, HPCL.
He said the price swing due to this disruption would be short lived if the supply is maintained. He said OPEC countries could also increase production to make up for the Saudi shortfall.
Pritam Kumar Patnaik, head, commodities, Reliance Commodities, said the impact has been already witnessed on both NYMEX and Brent oil prices, which have rallied more than 10 per cent. He added that with the US accusing the Iranian government of orchestrating the attack and Iran in turn threatening war, it is a cause of concern for crude prices globally.
The direct physical impact on the market might be limited, analysts say the development has the potential to move the market away from its bearish macroeconomic cycle and raise the risk premium as funds reduce their short positions.
“The sudden change in geopolitical risk warrants not only an elimination of the $5-10/barrel discount on bearish sentiment, but adds a potential $5-10/barrel premium to account for now-undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity. Price could move higher if Saudi production is confirmed to be curtailed for a more substantial period which is not our current assumption,” said Chris Midgley, global head of analytics at S&P Global Platts.