Attack on Saudi refinery threatens India’s already slowing economy

Oil’s not well.
Oil’s not well.
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India, the world’s third-largest oil importer, has a reason to worry as escalating geopolitical tensions in West Asia have raised the spectre of higher oil prices.

On Sept. 14, 10 drones targeted Saudi Arabia’s Abqaiq oil refinery and Khurais oil field, belonging to the state-owned Aramco. At the sites, which account for over 5% of global oil supply, the attacks sparked massive fires that were visible from outer space. While the US has blamed Iran, Yemen’s Houthi rebels, too, have claimed responsibility.

Saudi Arabia is the second-largest supplier of crude oil and cooking gas to India.

In the aftermath of the attacks, analysts have forecast an increase in global oil prices of between 10% and 15%, even though immediate supply-side disruptions may be averted.

“Currently (Sept. 13), Brent crude oil is trading around $60 per barrel and West Texas Intermediate (WTI) crude oil (a grade treated as a benchmark in oil pricing) is trading at $54.80 per barrel. Due to this attack, Brent crude may rise to  $65-70 per barrel and WTI may go up to $60-63 per barrel levels,” said Anuj Gupta of the Mumbai-based stock brokerage firm Angel Broking. “In tandem, petrol and diesel prices in India may rise by between Re1 and Rs3 per litre soon.”

Meanwhile, oil prices spiked in early trade today (Sept. 16). Brent crude futures jumped almost $12 a barrel, to touch $72. The 18% surge was the highest since Brent futures was launched in 1988.

Fuel prices in India are broadly linked to international crude oil prices. “The price at which it (crude oil) is imported will impact the Indian economy,” Gupta explained.

Impact on India

Higher import bills can potentially exacerbate the recent slowdown in the Indian economy.

“This is an exceptional situation. We are keeping a close watch,” an Indian government official, requesting anonymity, told the Mint newspaper.

Any spike in global crude prices will weigh heavy on India’s trade deficit. “Every dollar increase in the price of oil raises the import bill by around Rs10,700 crore annually. India spent $111.9 billion on oil imports in 2018-19. We are expecting the price of petrol and diesel may rise in the coming days,” said Gupta.

In this financial year ending March 2020, India imported 4.5 million barrels per day (MB/D) of crude oil between April and July. This is down 0.1 MB/D, compared with the same period in the previous financial year, mostly due to the US sanctions on Iran, credit agency CARE Ratings said in a research note (pdf).

Rising prices, though, could wipe out any gains from this lower consumption. 

Sufficient supply

The impact on prices notwithstanding, India’s fuel supply is unlikely to be hit, at least not for now.

“Currently, India has a capacity to meet about 12 days of the country’s crude oil requirement. The Vishakhapatnam cavern has a storage capacity of 1.33 MT, Mangaluru (1.5 MT), and Padur (2.5 MT),” said Gupta. “Indian refiners maintain 65 days of crude storage, and when added to the storage planned and achieved by Indian Strategic Petrol Reserves (ISPRL), that takes the Indian crude storage tally to 87 days.” ISPRL is the firm responsible for maintaining the country’s strategic petroleum reserves.

Global agencies do not foresee a major shortage either. “We are in contact with Saudi authorities as well as major producer and consumer nations. For now, markets are well supplied,” a spokesperson for Paris-based International Energy Agency (IEA), the world’s premier energy monitor, told Reuters. 

Meanwhile, turning to US supplies can also help India deal with an oil shortage if at all the situation arises. “India is now relying more on the US. Our crude oil imports from the US have risen three times,” said Urvisha Jagasheth, analyst at CARE Ratings.

Kuwar Singh contributed to reporting.