A contest has taken place in global oil, which has largely remained out of the spotlight as the world focuses on the pandemic and its impact on demand. The game recently attracted attention as the players all pretended not to play. Earlier this week, Saudi Arabia said it has increased the official selling prices of oil for Asian buyers. In response, India ordered its state refineries to reduce their purchases of Saudi oil. The game is on.
OPEC’s largest producer announced price increases for Asian buyers days after OPEC + agreed to add barrels to their daily production, reducing the production shortfall that India has repeatedly argued against an artificial way of keeping oil prices high. Next month, Asian refineries and traders will have to pay $ 1.80 above the Oman / Dubai standard average for transporting Saudi crude oil.
From one perspective, the Saudi move could be an attempt to keep revenues from its largest market stable, even if prices fall due to higher production, including exempt OPEC members Libya and Iran, both of which are increasing production.
From another, the move could be a warning for India to think twice before diversifying into other suppliers, as price is not the only consideration when it comes to oil imports, said Karunjit Singh of Indian Express wrote in a recent analysis on the subject, with reference to energy experts.
“This incident shows that there is not only the price of crude oil, but also terms such as shipping and the flexibility of contracts that producers can push back on as importers try to diversify their supply,” said an analyst in India. Pushing it out.
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And yet, in response to the Saudi price rise, New Delhi has told its refineries to reduce their orders for Saudi oil for May, which they immediately did. Indian refineries will now buy 36 percent less Saudi crude oil next month than previously planned. This amounts to approximately 9.5 million barrels in total for four major state refineries: Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp and Mangalore Refinery and Petrochemicals.
This compares with 10.8 million barrels to be purchased before the price increase, but it also compares with the average monthly import tariff of 14.8 million barrels from Saudi Arabia for the four refineries. It looks like the ball ended up in Saudi court.
What the kingdom intends is the proximity to India, which keeps the cost of shipping crude oil there low. It is also flexible in terms of production, as it has proven time and time again when it feels threatened by a co-producer, most recently – last year – Russia. The large size of its production capacity is also an advantage over smaller producers.
On the other hand, India and the other major Asian oil importer, China, have the choice of junk, and it is a growing junk. Last year, for example, Iraq was the leading oil supplier in India, but by the time this February is around, it has been replaced by the United States. The subcontinent is also import ru from the Central Asian countries, Africa and Latin America. This month also India bought its first loads of Norwegian crude, from the Johan Sverdrup field, with a total of 4 million barrels, two of which will be delivered in May and two in June.
India diversify away from the Middle East – read Saudi oil – and it has a good chance of scoring a big point against its opponent in the match, even if it is accidentally partial: an increase in new Covid -19 infections on the subcontinent this week pressure prices. This rise could not have come at a worse time for Saudi Arabia: some analysts see the price of Saudi Asia as a sign of its confidence in restoring demand for Asia. Demand has recovered in China and India – the world’s first and third largest oil importers – but any news of an increase in infections is enough to reverse the positive effect of the recovery on oil prices.
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Indian imports most of the oil he uses. At 80 percent, the share of imports in its consumption is uncomfortably high. Of this total, however, as many as 60 percent come from Middle Eastern suppliers – again an uncomfortably high dependence on a single and united group of producers.
‘We have asked companies to aggressively seek diversification. We can not be held hostage to the arbitrary decision of Middle Eastern producers. “When they wanted to stabilize the market, we stood by them,” said a New Delhi government source. Reuters in early March, noting that India did not cancel OPEC cargo last year, despite the destruction of demand.
The rift shows how the gap between the interests of oil sellers and their suppliers has deepened amid the pandemic. This is by far not the first time that Saudi-led OPEC has curtailed production to raise prices, but India has not been so outspoken in its opposition to such steps. However, with the economic recovery being extra fragile and the pandemic far from over, price sensitivity seems to be in full swing.
The good news for buyers like India is that supply is becoming wider and stronger: Guyana has joined the exporters club and India is already planning to start buying oil from the newcomer. The bad news is that diversification will cost it higher prices, which according to the government will eventually be worth it.
The good news for Saudi Arabia is that its production prices are still lower than most other suppliers. The bad news is that he may have used his price weapon early on, too much confidence that India has few other import options. At some point, therefore, the Kingdom may have to choose whether it prefers a larger market share in the third largest importer of crude world in the world, and whether it would bet on higher prices and fewer sales.
By Irina Slave for Oilprice.com
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