Singapore: The market appears quite relaxed about the escalating dispute between India and Iran over payment for oil supplies, but it has wider implications and may yet disrupt Asian crude markets.
For now there seems to be little concern that Iran will stop shipping 400,000 barrels a day of oil to India next month, the view being that Saudi Arabia and other Gulf suppliers can take up the slack.
That may well be the case in the short term, especially since some Indian refiners are undergoing maintenance in August anyway, but the longer-term picture of how India will replace 12% of its crude supplies isn’t so clear.
Also See | No Iran oil for Indian refineries for August
India hasn’t paid Iran for oil since December after the Reserve Bank of India halted a clearing mechanism under US pressure to crack down on doing business with Iran.
Already the Iranians are owed $5 billion, which must be hurting their struggling fiscal situation, and they finally put their foot down and said no more.
This raises some issues for both the crude oil market and the wider geopolitical situation in the middle east and Asia.
First, the market issues. While the focus has been on how India will replace its Iranian supplies, the question should also be asked, what are the Iranians going to do with their extra oil?
Indian petroleum minister S Jaipal Reddy says his country has a back-up plan to secure supplies.
The problem is he didn’t reveal what this was.
The most logical plan is for the Indians to buy their crude from the Saudis and other Gulf producers such as Kuwait and the United Arab Emirates.
That’s all well and good, but it does tighten the supply of those crudes by 400,000 barrels a day.
The Saudis are believed to be pumping more oil, perhaps as much as 10 million barrels a day, some 25% above their Organization of the Petroleum Exporting Countries target of 8.05 million.
So long as the Saudis are producing more, India can probably get the supplies it needs, but it’s also likely that the Saudis, knowing the demand is there, will see little need to lower prices.
On the other hand, the Iranians now have to try and sell the oil to other buyers, and that will present a few problems.
Not all Asian refiners can process their heavier grades, and some that can, such as Japan, won’t buy because of the US pressure.
That leaves China as the default buyer, with perhaps some of the slack being sent to Singapore, whose refiners can process around 1.5 million barrels a day.
But the Chinese have shown they are price-sensitive, and if they know there is a certain level of distress in Iran, they are likely to push for big discounts when buying crude.
Of course, the Iranians could put some of their output into floating storage in the hope a tighter market drives prices higher, but given their budget is weighed down by subsidy payments and the economy is still dealing with inflation above 10%, they are likely to be seeking immediate cash.
This may result in a tug-of-war in crude markets as the Saudis supply more oil at current high prices and the Iranians discount to find a new home for 11% of their output.
On the political front, the India payment issue may well raise the temperature between Saudi Arabia and Iran.
The surest way for the Saudis to show their displeasure at the Iranian-led move at the June OPEC meeting to keep output quotas unchanged is to take some of the Iran’s market share.
The Saudis, no doubt with US encouragement, may well make it harder for the Iranians to shift cargoes.
In fact, the United States may well be pleased with what’s happening, the Indians seems to be OK with their oil supplies, the Saudis are pumping more and the Iranians are under pressure, although it’s hard to see them buckling and ending their nuclear programme any time soon.
And what’s in it for India, why would they bother going to all this hassle just to please the Americans?
It’s no secret India wants a permanent seat on the UN Security Council and having the backing of the United States will help this endeavour. India also wants help with its nuclear power programme and the security of supplies of uranium fuel, something else the Americans can help with.
And the Chinese may well be happy too, buying Iranian crude at discounts.
Already they have been taking more from Iran, with June imports around 650,000 barrels a day, a jump of 53% from May, while year-to-date imports are up 49%.
Right now, crude markets in Asia might resemble something of a merry-go-round as producers shift who they sell to and buyers shuffle around suppliers.
(Clyde Russell is a Reuters market analyst. The views expressed are his own)