Iraq pips Saudi Arabia to become India’s top oil supplier

Iraq replaced Saudi Arabia in August as the top oil supplier to India, data from industry and shipping sources showed, as refiners turned to Iraqi barrels to compensate for a lower intake of Iranian oil ahead of U.S. sanctions in November.

Background 

Trade and commerce have been the most important pillars of the India-Saudi Arabia relationship. India is the third-largest crude oil importer in the world (4,930,000 barrels/day). Saudi Arabia has traditionally been India’s top oil source, but this financial year Iraq replaced it with a huge margin. Supply of oil of Saudi Arabia stood at 5.22 million tones, coming in the third place as Iraq’s supply of oil accounted for 7.27 million tones. This fall in the oil supply is partly due to firmer Saudi prices following the production cuts by the Organization of the Petroleum Exporting Countries (OPEC) since January. 

Analysis 

The world’s fastest-growing oil consumer is guzzling down Iranian crude before U.S. sanctions start squeezing supplies from the Persian Gulf nation. India imported 771,000 barrels of crude oil a day from Iran in May, a 35% increase from the previous month. This pushed the Islamic Republic up the ranks as the second-biggest supplier to the Asian nation, overtaking Saudi Arabia. Iraq retained the top position. 

There is a ratcheting up of competition among suppliers to capitalize on the Indian market as the country’s demand for oil grows. Nevertheless, even Iranian supplies are not secure as the reimposition of U.S. sanctions start to bite. During the previous round of sanctions, India was one of the few countries that continued to buy Iranian oil, although it had to reduce imports as shipping, insurance and banking channels were choked due to the European and US sanctions. Thus, India’s refiners were forced to slash Iranian oil purchases to about half their previous levels during the earlier sanctions. 

India, which imports over 80% of its oil, is attracted to Iran’s crude largely due to geographic proximity that can save on shipping costs, as well as the favourable financial terms offered by the Persian Gulf state, including the longest credit period among all of India’s suppliers. This helped boost their sales to India. Refiners in the South Asian nation were quick to ramp up imports from the Persian Gulf state after the previous round of sanctions were lifted in 2015. 

This May, Indian Oil Corp., the nation’s biggest refiner, boosted its crude purchases from the Middle East producer seven-fold and plans to buy term supplies of 7 million metric tons during the 12 months that began April, up from 4 million tons in the year earlier. Indian refiners shipped in 1.02 million barrels per day (bpd) of Iraqi Basra oil in August, an increase of about 46% from the previous month, while imports from Saudi Arabia declined 5% to about 747,000 bpd during the period. 

Indian refiners in recent years have invested heavily in modernizing plants that can efficiently process low-grade crudes into diesel and gasoline, helping to boost operating margins and giving greater flexibility in the oil grades they can buy. This has allowed refiners in the third-largest oil consumer to shop around during periods of tightness, and remain profitable in a fast-growing, cost-sensitive market. 

 

Assessment 

Our assessment if that Iraqi oil is a good alternative to the other heavy grades of OPEC. With each barrel of Iraq’s Basra Heavy oil trading at roughly $2.85 less than barrel of Saudi Arabia’s Arab Heavy mix, the Indian importers were able to realize a substantial cost-saving by making the switch, without much impact on product output. We feel that the delay to Venezuelan oil loadings due to problems at a major port helped boost India’s demand for Iraqi oil, and India also took more Russian Urals crude.  We also feel that with the new oil need, the future of the relationship between the two countries is optimistic, especially for developing oil and gas fields.