Crude Oil Prices: How U.S. Ending Iran Waivers Will Impact India

Indian oil refiners said they have tied up alternative supplies and the U.S.' decision to end waiver that allowed to import oil from Iran won't have much impact.

The Trump administration decided to eliminate waivers, also availed by Japan and China, to increase pressure on Iran to give up its nuclear programme. While announcing the move, Mike Pompeo, the U.S. secretary of state, said Washington's aim was to bring Iran's crude exports to zero.

The U.S., which walked out of a deal with Iran, introduced sanctions to cripple Iran's oil-dependent economy in November last year but gave a six-month waiver to eight nations, including India.

State-run Indian Oil Corporation Ltd., the nation's biggest oil refiner, said it has tied up for 3 million barrels crude oil per month from alternative sources from May after the waiver ends.

Indian Oil is shifting its crude sourcing strategy towards Kuwait Petroleum Corporation and Abu Dhabi National Oil Company and other countries like Mexico and Saudi Arabia, among others, to fill the Iran oil gap, Director (refineries) AK Sharma told BloombergQuint over the phone. “We have sufficient quantities from these suppliers, so we will be able to manage our requirements.”

Indian Oil bought 4.5 million metric tonnes of crude oil from Iran in the last six months. India's oil imports from Iran, according to a Reuters report, fell 45 percent in January to 270,500 barrels per day. India was restricted to 300,000 barrels a day of crude oil from Iran during the waiver.

“We are also tying up quantities for June,” Sharma said.

Hindustan Petroleum Corporation Ltd. said the move will not significantly impact its crude sourcing strategy because it doesn't import much from Iran.

“We import majorly from Saudi Arabia,” MK Surana, chairman and managing director of Hindustan Petroleum Corporation, told BloombergQuint over the phone.

Hindustan Petroleum Corporation contracted 0.7 million tonnes crude oil from Iran in 2018, Surana had said at a press meet in February this year.

Financial Implications On Refiners

It may not be a big challenge to source crude from alternative sources, but would have financial implications, according to K Ravichandran, senior vice president at ICRA Ltd.

“First, there will be a sentimental impact on pricing in market that has already gone up,” Ravichandran told BloombergQuint over the phone. “There may be further pressure as crude may touch $75-80 per barrel in the near term. That would put pressure on India's import bill.”

“Second, Iran used to offer slightly longer credit period compared to other crude suppliers. General norm in the market is about 30 days but Iran used to offer 60 days credit period to the refiners, official pricing is less, insurance is free, so there will be financial impact on refiners,” he said. “They, however, could look at U.S. crude, which is almost $2 per barrel cheaper compared to other Middle East crude.”

But buying U.S. crude may impact pricing for refiners as its haulage period is longer.

“Normally, voyage period for import of crude from Middle East is about two weeks. Whereas, voyage period for U.S. crude will be about a month,” Ravichandran said. “If there is a sharp fall in the oil price between the purchase and delivery period, refiners will lose out money. So, there is a pricing risk involved in longer hauled crude.”

Oil Price To Rise

The U.S.' decision may reflect on global oil prices that may temporarily go up. That, in turn, may push fuel prices in India. Oil prices jumped to their highest in more than five months on Monday. Brent, the international benchmark, jumped 2.5 percent to $73.77 a barrel on Monday, according to Bloomberg data. West Texas Intermediate rose 2.1 percent to $65.39 a barrel.

“With elections midway, there may be some potential delays in passing on the cost to consumers,” said Ravichandran. “In the normal course, when oil marketing companies pass on the costs to consumers, marketing margins for the companies get impacted briefly. But eventually, they will be able to recover from these losses.”