Slow ramp up of crude production by OPEC+ has led to a surge in prices much to the chagrin of big consumers like India. With an approval from US President Biden, Iran may provide a welcome solution to New Delhi’s current challenge.
On January 5 when members of the OPEC+, the oil cartel that comprises 23 countries that between them control over half of global crude oil production, met to decide on the course of resumption of operations at the oil wells that had been shut down due to coronavirus in 2020, they would not have known the impact of it in Sriganganagar, a small town at the northern most tip of India’s desert state of Rajasthan.
At that meeting the countries decided to go slow on production in a bid to shore up global oil prices that would then boost their margins. In subsequent meetings they have only reiterated their position. Currently OPEC+ is reining in production of about 7 million barrels per day of production -- about 7 per cent of pre-pandemic supply -- which has led to a surge in Brent crude prices by a whopping 80 per cent since November. On top of this Saudi Arabia has taken a voluntary 1 million bpd production cut in February and March.
As citizens of Sriganganagar found out in mid February, this is bad news for import-dependent nations like India. Prices of the Indian basket of crude have gone up from just $ 40.66 per barrel in October to a shade under $ 70 per barrel today--a rise of nearly 68 percent in under 6 months. As a result, the cost of a litre of petrol shot up to a historic high of over Rs 100 a litre in the town. Since then, the three-digit mark has been breached in over two dozen other districts in the country.
This had led to India’s oil minister Dharmendra Pradhan vent his frustration openly at oil producing countries not keeping their side of the bargain. India is the third largest consumer of oil in the world and its view carries enough heft in the global market.
"A few months back we all were discussing about consumption-centric economic revival, demand revival, and we are supposed to restrict our production cuts and gradually ramp up the production by January - but in contradiction to that, now we all are controlling the oil production," Pradhan said at an energy conference organised by the Atlantic Council. "This kind of scenario will push us to more alternative methods of energy sourcing ... if the producing country will not recognise our aspirations, then innovative new business models are bound to come up."
India had supported OPEC’s decision to cut production last year in view of the oil demand collapsing due to the spread of COVID-19.
"At that point in time, the producers especially OPEC assured the global market, that by the beginning of the 2021 demand will be coming back and production will be as usual. But I am sorry to say the production is yet to be normal," Pradhan said. "If you do not supply properly if there is a gap in demand and supply artificially (created), there is a price rise."
A few days later responding to Pradhan’s comments, Saudi energy minister Prince Abdulaziz bin Salman said the country should instead dip into its crude storage it had filled to the brim at low prices last year.
"With regard to India, very simple. I would ask my friend that he withdraw some of the cheap oil that they bought in April, May and June (last year)," the Saudi Minister said. "There is an opportunity cost for not withdrawing it now."
India had indeed purchased 16.71 million barrels of crude in April-May, 2020 and filled all the three Strategic Petroleum Reserves created at Visakhapatnam in Andhra Pradesh and Mangalore and Padur in Karnataka. The average cost of that crude purchase was $ 19 per barrel. Yet, the purpose of strategic reserves is not for controlling domestic prices from global price fluctuations.
While it may sound like the two countries were trading barbs at each other, India and Saudi Arabia share a deeper and stronger strategic relationship for it to even matter. The larger question of the need for India to continuously diversify its sources for oil remains valid. As per a report by IEA, India's oil demand is expected to rise by 5.8 million barrels per day by 2040, accounting for about 40 per cent of the overall increase in global demand during the period. Global oil demand at the same time will increase to 111.7 million bpd in 2040.
India, which requires about 4.5 million barrels a day, has been trying to reduce its dependence on oil supply from OPEC. It also faced an unforeseen challenge of finding an alternative to Iran when former US President Donald Trump put sanctions against the country. In 2018-19, when India imported 226.5 million tonnes (mt) of crude oil, 23.9 million tonnes came from Iran, which was then the third-largest oil supplying nation. Following the diktat from US, imports from Iran skittled to just 1.7 MT in 2019-20 even as the overall crude import remained stable at 227 mt.
The change of guard in Washington in January and expectations that President Joe Biden will take a much softer stance on Iran could once again opened the doors for the country to make a comeback in the global oil export market. With an annual crude production of 234 million tonnes in 2017, Iran was the world's fifth-largest oil producing nation. It was also hugely supportive of Indian buyers and had extended credit of upto 60 days. Iran’s re-entry would be good news for India.
Already back-channel negotiations have begun and reports suggest Iran could start pumping upto 2 million barrels of oil every day. Despite it being a part of OPEC+, it would lead to a drop in global crude prices, which would in turn boost India's macro-economic indicators.
With global crude prices hovering around $ 70 per barrel and major oil producing countries determined to inflate it further, India like other import dependent countries needs a leverage. Iran’s comeback could provide just that.