Israel-Iran standoff threatens India’s energy security

Oil prices continued to rally on Friday, adding to Thursday’s big gains as the Middle East crisis worsened. Crude oil futures rose as much as 5% in Thursday’s session after President Biden said his administration would support Israel strikes Iran’s oil facilities, adding that option is under discussion. Brent crude for delivery in November gained 2.0% in the Friday session to trade at $79.12 a barrel at 1:20 PM ET, while WTI crude changed hands at $75.38 a barrel after gaining 2 .3%. Clearview Energy Partners predicted oil prices could gain as much as $28/bbl if flows are blocked in the Strait of Hormuz; $13/bbl if Israel strikes Iranian energy infrastructure and $7/bbl if the US and its allies impose economic sanctions on Iran.

Hormuz is the world’s most important oil transit choke point. Choke points are narrow channels along widely used global shipping routes that are critical to global energy security. Even temporary disruptions along these critical routes can substantially increase shipping costs, raising global energy prices. Located between Oman and Iran, Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea.

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While the latest rise in oil prices comes as a boon to long-suffering oil bulls, countries that rely heavily on Middle Eastern energy imports are by no means celebrating. One such country is India. While there has been much focus of late on India’s increasing imports of Russian oil, the country actually buys most of its oil from the Middle East. In August, the Middle East accounted for 44.6% of India’s crude oil imports, up from 40.3% in July. Iraq, Saudi Arabia, United Arab Emirates and Kuwait are the main suppliers of Middle Eastern oil to India. In contrast, the share of Russian crude fell to 36% after five consecutive months of increases.

Meanwhile, India imports almost half of its liquefied natural gas (LNG) from Qatar. In February, India’s Petronet LNG (PLL) and QatarEnergy with ink a long-term LNG Sale and Purchase Agreement (SPA) for the supply of approximately 7.5 million metric tonnes per annum (MMTPA) of LNG to India over the next 20 years. The deal involves LNG imports of $78 billion by PLL over the contract period

Important Oil shipping routes such as the Red Sea and the Strait of Hormuz can be disrupted by a full-scale war. A blockade of the Strait of Hormuz would be particularly alarming for India, as it is the route it uses to get oil from Iraq and Saudi Arabia and LNG from Qatar. Moreover, India’s economy would certainly be affected if oil and gas from the Middle East were cut off. An oil price shock would likely force the government to divert funds from activities such as building infrastructure to spend on higher fuel subsidies. According to a Morgan Stanley report, every $10 per barrel increase in oil prices could lead to a 0.5 percentage point increase in India’s Consumer Price Index (CPI).

More Russian oil

There is a high probability that India will resort to buying even more Russian energy products if the situation in the Middle East becomes unbearable. In July, India became the world’s the largest importer of Russian oilsurpassing China. Indian trade and industry supply data showed the country imported 2.07 million barrels per day (bpd) of Russian crude in July, good for a 4.2% M/M and 12% Y/Y increase. That exceeded it July oil imports from China 1.76 million bpd by pipelines and transports, based on Chinese customs data.

Indian refiners have been buying Russian crude at a discount to Brent since Western nations cut imports of Russian energy products following the Ukraine invasion. India’s purchase of Russian ESPO Blend crude rose to 188,000 bpd in July as larger Suezmax vessels were deployed. Refineries in northeastern China are typically the biggest ESPO buyers due to their proximity to Russia; however, they are now buying less because of the hot demand for fuel.

“India’s need for Russian oil will increase as long as sanctions are not tightened,“, an Indian refining source told Reuters.

But there’s a catch: India imports oil from Russia via the Red Sea, meaning disruptions here would force the country to rely on the longer — and more expensive — route through the Cape of Good Hope to avoid attacks.

The country is also now likely to accelerate the development of its domestic oil and gas resources. Four largely unexplored sedimentary basins of India could hold up to 22 billion barrels of oil, S&P Global Commodity Insights reported. In fact, the lesser-known Category II and III basins namely Mahanadi, Andaman Sea, Bengal and Kerala-Konkan contain more oil than the Permian Basin, which has already produced 14 billion of the 34 billion barrels. recoverable oil reserves.

Rahul Chauhan, an upstream analyst at Commodity Insights, highlighted the potential of India’s untapped oil and gas sector, ”ONGC and Oil India hold acreage in Andaman waters under the Open Surface Licensing Program (OALP) and have several significant projects planned. However, India is still awaiting the entry of an international oil company with experience in deep and ultra-deep water exploration to participate in the current and future OALP bidding rounds and explore these frontier regions.s”, he declared.

Currently, only 10% of India’s 3.36 million sq km sedimentary basin is being explored. However, Petroleum Minister Hardeep Singh Puri says the figure will rise to 16 per cent in 2024 after blocks are awarded under the Open Surface Licensing Policy (OALP) rounds. To date, OALP has seen the award of 144 blocks covering approximately 244,007 sq km.

By Alex Kimani for Oilprice.com

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