There is a match going on in global oil, which has largely stayed out of the spotlight as the world focuses on the pandemic and its effect on demand. The game only attracted attention recently when the players dropped all pretensions that they were not playing. Earlier this week Saudi Arabia said it fetched the official selling prices for its oil to Asian buyers. In response, India ordered its state refiners to reduce their Saudi oil purchases. The game is on.
OPEC’s largest producer announced the price hikes for Asian buyers days after OPEC + agreed to add barrels to their daily production, reducing the production constraint that led India to repeatedly protest what it calls an artificial way of raising oil prices. to keep. Next month, Asian refiners and traders will have to pay $ 1.80 above the Oman / Dubai benchmark average for shipments of Saudi crude oil.
From one perspective, the Saudi move could be an attempt to keep revenues from its largest market stable, even as prices fall due to higher production, including exempt OPEC members Libya and Iran, both of which are ramping up production.
On the other hand, the move could be a warning to India to think twice before diversifying to other suppliers, as price is not the only consideration when it comes to oil imports, Karunjit Singh of the Indian Express wrote in a recent analysis on the topic, citing energy experts.
“This incident shows that there is not just the price of crude oil, but terms like shipping and contract flexibility that producers can roll back as importers try to diversify their sources of supply,” said an India-based analyst. To express.
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And yet, in response to the Saudi price hike, New Delhi told its refineries to cut their Saudi oil orders for May. did it promptlyIndian refineries will buy 36 percent less Saudi oil next month than previously planned. That would total about 9.5 million barrels for four major state-owned refineries: Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp, and Mangalore Refinery and Petrochemicals.
This compares to 10.8 million barrels planned to be purchased before the price increase, but it also compares to an average monthly import rate of 14.8 million barrels from Saudi Arabia for the four refineries. The ball appears to have ended up in Saudi court.
What the Kingdom is all about is proximity to India, which keeps crude oil transport costs low there. It is also flexible in terms of production, as it has proven time and again when it feels threatened by a fellow producer, most recently – last year – Russia. The size of the production capacity alone is also an advantage over smaller producers.
On the other hand, India – and the other major Asian oil importer, China – has a choice of the waste, and it is a growing waste. Last year, for example, India’s largest oil supplier was Iraq, but by February it was replaced by the United States. The subcontinent is too import crude oil from the Central Asian countries, Africa and Latin America. This month also India bought its first shipments of Norwegian crude oil from the Johan Sverdrup field, totaling 4 million barrels, two in May and two in June.
India is diversifying away from Middle Eastern oil, read Saudi Arabia, and it has a good chance of scoring a big point against its opponent in the match, even if it’s in part accidentally: an increase in new Covid -19 infections on the subcontinent this week put under pressure Prices. This rise could not have come at a worse time for Saudi Arabia, with some analysts seeing Saudi Asia’s price movement as a sign of their confidence in the recovery in Asian demand for oil. Indeed, demand is recovering in both 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 that recovery on oil prices.
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India imports most of the oil it uses. The share of imports in consumption is uncomfortably high at 80 percent. However, of this total, as much as 60 percent comes from Middle Eastern suppliers – again an uncomfortably high degree of dependence on a single and united group of producers.
“We have asked companies to aggressively seek diversification. We cannot be held hostage by the arbitrary decision of Middle Eastern producers. When they wanted to stabilize the market, we kept up with them, ”said a source from the New Delhi government Reuters In early March, it noted that despite the destruction of demand, India has not canceled OPEC shipments last year.
The argument shows how the divergence between the interests of oil buyers and those of their suppliers has increased during the pandemic. This is by no means the first time that Saudi-led OPEC has limited production to raise prices, but India has not been so outspoken against such moves. However, now that the economic recovery is extra vulnerable and the pandemic is far from over, price sensitivity appears to have increased enormously.
The good news for buyers like India is that the supply is plentiful and growing: Guyana has joined the exporters’ club and India already has plans to buy oil from the newcomer. The bad news is that diversification will cost it higher prices, which the government says will ultimately be worth it.
The good news for Saudi Arabia is that production prices are still lower than most other suppliers. The bad news is that it may have used its prize weapon prematurely as it is too confident that India has few other import options. At some point, therefore, the Kingdom may have to choose whether it would prefer a larger market share in the world’s third largest crude oil importer or whether it would bet on higher prices and less sales.
By Irina Slav for Oilprice.com
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