Last month’s embargo on Iranian oil from the EU and the US is sure to impact India. Nearly 10 per cent of India’s crude oil requirement, worth $13 billion, is met by Iran at present. Given India’s high dependence on Iran, any drastic step has been ruled out. Though Iran is offering a very competitive payment option to India for its crude oil, India is likely to cut imports by 10 per cent as have China and Japan.
For starters, the Iran situation is sure to have an impact on crude oil prices, as the world has little spare capacity. Iran exports 2.5 million barrels of crude oil every day. Oil experts estimate the current Opec spare capacity at 3.8 million barrels a day or 4.2 per cent of current global oil demand. Of this, 1.8 million barrels a day is with Saudi Arabia. Given the disruptions caused in West Asian countries last year, it appears that most Opec members are producing at optimum capacity. Hence, disruption of crude oil prices and supplies could affect India very negatively. Also, Asia’s 10 per cent cutback “may appease the US and EU” for only some time, believe analysts.
Given the world is not flush with crude supplies at the moment, disruption in supplies will mean significantly higher prices. Brent crude is already at $120 a barrel, indicating upward bias. Not only will this impact the cost at which India imports crude oil, but will also impact companies that have any kind of an exposure to Iran.
According to Macquarie, “As the US and EU-led oil embargo on Iran bites, we believe India may undergo severe economic stress.” This apart, companies which have an exposure to Iran could also be affected, albeit in different ways. Macquarie says seven of Aban’s 17 rigs are deployed in Iran, which typically earn 30-50 per cent premium over market rates. “Potential war or payment disruptions could cripple its severely debt ridden balance sheet,” the report says.
However, this development may have some positive implications for refiners. Given India may have to replace some of Iran’s sweet light crude supplies with the heavier Saudi variety, the refining spreads between light and heavy crude will rise. In recent times, spreads have narrowed, which has impacted the profitability of players like Reliance Industries. Some of the companies that import crude from Iran include MRPL (seven million tonnes per annum or mtpa of Iranian crude), Essar Oil (five mtpa), HPCL (3.2 mtpa) and IOC (2.5 mtpa). Analysts say Indian firms with the highest complexity that could benefit from rise in light-heavy crude oil spread are RIL, HPCL, Essar Oil and BPCL.