Saudi Arabia's pipeline closure raises cost of India's crude haul

Closure of Saudi Arabia's East-West pipeline could constrain routing options for Indian refiners and raise landed crude costs as key transit routes face disruptions

The closure of Saudi Arabia’s East-West oil pipeline is likely to further constrain routing options for Indian refiners and raise the cost of crude imports as several major oil transit routes face disruptions, according to experts.

 

The development comes amid heightened tensions between the US and Iran, increasing concerns over both the availability and delivered cost of crude for major Asian importers. "The closure of the Saudi East-West Pipeline further reduces routing flexibility for Indian refiners at a time when several key oil transit routes are already under pressure,” said Sumit Ritolia, lead analyst at maritime intelligence firm Kpler.

 

India is likely to increase its reliance on crude from Russia, the US, West Africa, Latin America and other non-Middle East sources as refiners seek to reduce their dependence on any single supply corridor, Ritolia added.

 

Russian crude could become particularly important as multiple chokepoints face disruption. Barrels shipped through the Black Sea and Baltic could gain greater value from a supply-security perspective as refiners look for alternatives to Middle Eastern supplies.

 

However, diversification may not fully shield India from the financial impact of the disruptions. “The bigger risk for India is not only physical availability of crude, but the rising landed cost,” Ritolia said, adding that higher crude prices, freight and insurance costs, and longer voyages could all increase the delivered cost of oil.

 

For India, higher landed crude costs could translate into a larger oil import bill, increased pressure on the current account and the rupee, and greater inflationary risks if elevated energy prices persist.

 

There could also be pressure on the margins of state-run oil marketing companies (OMCs) if domestic fuel prices are not increased in line with higher international crude and freight costs. The government’s fiscal position could also come under pressure depending on the extent to which it absorbs higher energy costs. 

 

Meanwhile, Rystad Energy said Asian refiners have the greatest direct exposure to the disruption. Most Indian, Chinese and Taiwanese customers had been instructed to lift September cargoes from Yanbu, while Japanese and South Korean customers had increasingly been offered crude from Sidi Kerir because of tanker resistance to the southern Red Sea route.

 

“The market should therefore first see delayed or reduced deliveries into China, Taiwan and India,” Rystad said. Japan and South Korea may initially be protected by barrels already positioned at Sidi Kerir, but their exposure would increase if receipts into the SUMED pipeline decline.

 

“Supply is becoming a prized commodity, and without greater clarity on where replacement barrels will come from, we wouldn’t be surprised to see prices push higher in the short term,” said Janiv Shah, vice president, commodity markets (oil) at Rystad Energy.

 

Brent crude futures surged above $108 a barrel on Monday, rising more than 3 per cent, as the shutdown of Saudi Arabia’s East-West pipeline and fresh attacks in the Strait of Hormuz heightened concerns over global oil supply disruptions.