Love for discounts moves India closer to US crude market

India is getting US crude oil cheaper by at least $2/bl compared to OPEC countries

With Petroleum Minister Dharmendra Pradhan talking about alternative energy sources with competitive prices, Indian companies have already started tilting towards the US spot market. According to sources, orders worth $600 million have already been placed by Indian companies in the US so far and that figure is likely to increase by nearly $2 billion in the near future. 

This is also seen as an effort by the government to meet the long-standing demands of the Trump administration to reduce the trade deficit of the US with India. India's exports to the US stand at $72 billion, while imports come to only around $30 billion. Sources reveal that India also gets an advantage of getting the US crude at prices cheaper by at least $2 a barrel than those supplied by the Organization of the Petroleum Exporting Countries (Opec).

"We have already contracted 7.85 million barrels of crude oil for an overall contract worth about $450 million from the US market. In fact, US crude oil imports have the potential to increase bilateral trade by at least $2 billion," said an official close to the development. While Indian Oil Corporation (IOC) is set to source 3.9 million barrels for its Paradeep refinery, Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are set to source 2.95 million barrels and 1 million barrels, respectively, for their Kochi and Vizag refineries.

According to a Reuters report, Mukesh Ambani-led Reliance Industries (RIL) has also bought its first-ever crude oil cargoes, which include 1 million barrels each of West Texas Intermediate (WTI) Midland and Eagle Ford crude, from the US. The shipment is expected to arrive in India by November.

"Diversification of market will be good as the demand for crude in India is set to grow by at least four to five per cent per annum, compared to a global average of 1.5 per cent. US crude has never come to India before but it can be effectively used for many Indian refineries like Jamnagar and Paradeep, which are equipped to handle the complex mix of crude oils, including sweet, sour, and heavy crudes," said Anish De, partner and lead energy and infra advisory, KPMG. 

Out of the total $450-million order by state-run companies, IOC has already imported 1.6 million barrels. The company is planning to process the US crude at its Paradip, Haldia, Barauni, and Bongaigaon refineries. "We want to get over the buyer and seller relationship. It should be mutually beneficial with a responsible pricing. As a consumer, we would like to import from those who offer us competitive pricing," Pradhan said. This can be seen as a shift in focus from the Opec, which has a share of 86 per cent of crude oil and 75 per cent of natural gas imports by India, towards the US by India.

According to reports, Iraq surpassed Saudi Arabia as the largest exporter of crude to India. While Iraq contributed about 23 per cent of India's imports, Saudi supplied about 17 per cent in the month of May. Experts believe that its proximity to India still makes the Middle East a more favourable destination than the US as, unless the fuel is swapped, transportation costs would become a huge burden.

On the shift in the country's import strategy, Opec Secretary-General Sanusi Mohammad Barkindo said, "This is a global market. As you know, since December of 2015, the US has lifted the ban on exports and, therefore, you have been seeing gradual rise in export numbers. Of course, Asia remains a prime destination for exports, particularly sweet crude into this growing market." Barkindo also added that both Opec and independent producers in the US have a shared responsibility of restoring stability in the crude oil market.

Indian companies, both public and private, have made sizeable investments in US Shale assets with a total investment of approximately $5 billion. Meanwhile, the first contracted LNG by Gas Authority of India (GAIL) is expected to be delivered to India in January 2018, which the US expects will reduce the trade deficit between both the countries.