Less worried about supply disruption than effect of price rise.
Indian oil companies are watching the situation around the Strait of Hormuz, which Iran has threatened to close if US sanctions against it escalate.
The rising possibility of a ban on Iran’s oil exports by the US and the European Union is pushing prices higher, said analysts. India’s crude oil basket price closed at $112.03 a barrel yesterday, $1.63 higher from the earlier close. This week, the oil basket averaged $110.12 a barrel; it was $107.20 in December.
Iran, the world’s fourth-largest producer, has threatened to block supplies through the Strait if the US and Europe impose sanctions on its oil industry, owing to its nuclear activities. Recent sanctions imposed by the US already make it difficult for most countries to buy Iranian oil.
India imports around 75 per cent of its crude needs and Iran is the second-largest supplier, after Saudi Arabia. Iran also exports oil to China, the EU, Japan, Turkey and South Korea.
Indian oil companies said they were not too worried about supply; the greater concern was price, likely to rise with the trouble. “Our arrangement of payment through a Turkish bank is working fine. As long as that is in place, we don’t have any threat (of supply),” said an official from Mangalore Refinery and Petrochemicals. Indian refiners had, last year, begun settling crude oil payment with Iran through Turkey’s state-owned Halkbank. The mechanism was drawn up after US opposition to direct Indian purchases of Iranian oil.
The threat from Iran to close the “world’s most important oil route” has set the stage for a price rise of Brent crude oil, said an assistant vice-president of research in a Mumbai-based broking firm.
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“Iran’s threat in retaliation to tighter sanctions from the US and a possible ban on its crude exports to Europe is already playing on the Brent price, which is set to rise four per cent in the first week of 2012. But I personally think the Iran issue may die its own death. It is too risky to go that way,” he said.
However, an increase in crude oil prices would significantly impact the finances of our oil marketing companies. “A dollar increase in the crude oil price increases the company’s working capital requirement by Rs 350 crore a month,” said P K Goyal, director (finance) at Indian Oil Corporation, the country’s biggest refiner and fuel marketer. “Plus, it translates into an additional Rs 8,000 crore increase in total under-recovery of the three oil marketers on diesel, kerosene and domestic cooking gas.” The three are retailed at a government-set price, well below the market one.
Hindustan Petroleum Corporation says though not entirely dependent on Iran for crude supplies, price volatility would increase due to this issue, raising uncertainty. “Any increase in oil prices will translate into higher under-recoveries. We hope the price rise does not continue, as it will affect all economies badly,” said K Murali, director (refineries). HPC also imports crude from Saudi Arabia and Kuwait.
S P Garg, director (finance) of ONGC Videsh, said: “If things do not precipitate further in Iran, the crude price will remain range-bound. But if the situation escalates, prices will increase. This will not be in the interest of oil importing nations like India.”
India’s crude oil basket comprises Oman-Dubai sour grade and dated Brent sweet crude in a 65.2:34.8 ratio.
As of yesterday, the Oman oil basket rose $2.12 a barrel to $11.36, while the Dubai oil basket gained $2.23 a barrel to $110.81. Dated Brent climbed 63 cents to $113.81 a barrel.