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India’s relationship with OPEC is now more important than ever before. Any lingering resentment between India and Saudi Arabia over the price of crude should be quickly forgotten in order to focus on each other’s growing importance as a consumer and supplier.
If OPEC needed a reminder of India’s importance as a customer, it got it in the most inconvenient way possible: a resurgence of the coronavirus pandemic in the world’s third largest oil importer.
According to S&P Global Platts Analytics, India’s oil demand growth in 2021 will be just 350,000 barrels per day (b/d), owing to extreme consumption weakness in April and May, with much pinned on a recovery later this year.
Given how hard the second wave of the pandemic has hit India’s oil consumption, Platts Analytics expects oil demand to remain below 2019 levels due to a poor first half of the year.
Meanwhile, if India needed a reminder of the importance of a consistent supply from the Middle East, all it has to do is look at the recent cyberattack on the Colonial pipeline in the United States or the dangers of tankers travelling long and expensive distances to deliver crude.
So, while India has ordered state-owned refineries to diversify crude imports faster to reduce reliance on the Middle East, don’t expect major changes. Variety is important, but so are strong bonds and crude grades that refiners prefer.
Due to India’s diversification drive, the Middle East continued to be the largest crude supplier to India in the first quarter of 2021, despite its share dropping by 2 percentage points to 59 percent. While having a variety of crude sources to choose from has many advantages, refiners have preferred crudes for the products they produce.
Dharmendra Pradhan, India’s oil minister, called Saudi Arabia’s advice to reduce oil storage to combat high crude prices “undiplomatic” in March. Pradhan had previously criticised OPEC and Saudi Arabia’s price-supporting cuts and emphasised the need for alternative supply sources.
The OPEC+ alliance, which controls about half of the world’s crude production capacity, will meet online on June 1 to assess market conditions and discuss plans to ramp up output.
The coalition plans to increase production by about 2.1 million barrels per day from May to June, with about 1.4 million barrels per day coming from Saudi Arabia, which has been implementing an extra output cut below its quota that it plans to unwind.
Saudi Arabia, the world’s largest crude exporter, reported pumping 8.134 million barrels per day in April, compared to a quota of 9.12 million barrels per day.
Iran complicates OPEC+’s plans to reintroduce more crude to the market, potentially giving India and other buyers a wider range of Middle East crude grades.
While significant progress has been made toward the reinstatement of the nuclear agreement, the OPEC member is nearing a deal with the US for sanctions relief. According to market sources, Iran has increased its crude output in recent months and has found a consistent buyer in China. According to the most recent Platts survey released on May 10, the country’s total output reached 2.43 million b/d in April, the highest since May 2019.
Iran’s crude and condensate exports are expected to increase from 800,000 barrels per day in April to 1.4 million barrels per day in December, and 2 million barrels per day by July 2022, according to Platts Analytics.
After the US revoked oil sanction waivers in early 2019, India, Japan, and South Korea completely halted imports. In 2017, Indian refiners purchased nearly 800,000 barrels per day of Iranian crude, and they will have plenty of options from other key suppliers such as Iraq and Saudi Arabia.
While analysts disagree on where oil prices will go, Platts Analytics believes that fundamentals will keep Dated Brent above $70/b through July before easing through the rest of the year.
While the pandemic and higher oil prices are putting a strain on India, the worst is yet to come. And for India, that dawn could be one of closer ties with OPEC and a growing importance of each other as a consumer and a supplier.
