There has been a party in world oil, which has stayed out of the spotlight as the world focuses on the pandemic and its effect on demand. The match drew attention recently as the players let go of all the pretense of not playing. Earlier this week, Saudi Arabia dit it was raising official selling prices for its oil to Asian buyers. In response, India ordered state refiners to reduce their purchases of Saudi oil. The game is up and running.
OPEC’s largest producer announced price hikes for Asian buyers days after OPEC + agreed to start adding barrels to its daily production, lowering a production limit that has caused India to repeatedly protest against what he calls an artificial way to keep oil prices high. Next month, Asian refiners and traders will have to pay $ 1.80 above the Oman / Dubai reference average for Saudi crude shipments.
From one perspective, the Saudi measure could be an attempt to keep its largest market revenues stable, even if prices fall due to higher production, including OPEC-exempt members, Libya and Iran, which increase production.
On the other hand, this measure could be a warning to India to think twice before diversifying into other suppliers because price is not the only consideration when importing oil, according to Karunjit Singh of the Indian Express he wrote in a recent analysis on the subject, citing energy experts.
“This incident shows that there is not only the price of crude oil, but terms such as shipping and the flexibility of contracts that producers can push if importers try to diversify their source of supply,” said an analyst based at the l ‘India, quoted by India Express.
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However, in response to the rise in Saudi prices, New Delhi told refiners to cut their Saudi oil orders by May, which he quickly did. Now, Indian refiners will buy 36% less Saudi crude next month than previously planned. That would mean about 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 the expected 10.8 million barrels to buy before the price rise, but also compares with an average monthly import rate of 14.8 million barrels from Saudi Arabia for the four refiners . The ball appears to have landed on the Saudi court.
What the Kingdom is looking for is its proximity to India, which keeps the cost of sending crude there low. It is also flexible in terms of production, as it has shown time and time again when it feels threatened by a production partner, most recently – last year – Russia. The large production capacity is also an advantage over smaller producers.
On the other hand, India — and the other major Asian oil importer, China — has a choice of garbage, and it is a growing garbage. Last year, for example, Iraq was India’s largest oil supplier, but once it occurred this February, it had been replaced by the United States. So is the subcontinent import crude from the countries of Central Asia, Africa and Latin America. This month, India too bought its first loads of Norwegian crude, from Johan Sverdrup’s field, with a total of 4 million barrels, two to be delivered in May and two in June.
India is diversifying from Middle Eastern oil (read the Saudi) and has a good chance of getting a big point against its opponent in the party, albeit unintentionally in part: an increase in new Covid-19 infections in the subcontinent this week pressed prices. This rise could not have come at a worse time for Saudi Arabia: some analysts saw the price of Saudi Asia moving as a sign of its confidence in the recovery in Asian oil demand. In fact, demand has been recovering in both China and India (the world’s largest and third largest oil importer), but any news of an increase in infections is enough to reverse the positive effect of this recovery on oil prices.
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India imports most of the oil it uses. At 80%, the proportion of imports in their consumption is uncomfortably high. Of this total, however, up to 60 percent comes from Middle Eastern suppliers, again, an uncomfortable degree of dependence on a single, united producer group.
“We have asked companies to aggressively seek diversification. We cannot be held hostage to the arbitrary decision of Middle Eastern producers. When they wanted to stabilize the market, we were by their side, “said a New Delhi government source Reuters in early March, noting that India did not cancel any OPEC charges last year despite the destruction of demand.
The dispute shows how the divergence between the interests of oil buyers and those of their suppliers has deepened amid the pandemic. It is by no means the first time that Saudi-led OPEC has limited production to raise prices, but India has not been so forceful in its opposition to such moves. Now, however, with the extra fragile economic recovery and the pandemic far from over, it seems that price sensitivity has grown.
The good news for buyers like India is that the supply is wide and growing: 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 you higher prices, which, according to the government, will be worth it, ultimately.
The good news for Saudi Arabia is that its production prices are still lower than most other suppliers. The bad news is that it may have used the price gun prematurely, over-relying on India to have few other import options. At some point, therefore, the Kingdom may have to choose whether to prefer a larger market share in the world’s third largest importer of crude oil or whether to opt for higher prices and fewer sales.
By Irina Slav for Oilprice.com
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