US sanctions against Iranian oil exports take effect on 4 November, but the impact is already starting to show. India’s crude oil imports from Iran fell in the first half of August, according to a report by Edelweiss Securities Ltd, citing data from FGE, a global oil and gas consultancy. The accompanying chart has the details. A weaker August comes after a strong July. The US sanctions are expected to make it challenging for India to sustain oil imports from Iran, its third-biggest crude supplier.

“As India explores alternative supplies, import costs are likely to rise as Iran offers extremely competitive terms, which include, among others, free shipping and extended credit terms of about 60 days," Edelweiss said in its report on Tuesday.

Note that the Indian rupee is weak too, which will weigh on import costs.

Of course, this assessment on Iran’s crude oil exports for August could prove to be premature, as data is for the first half of this month only. One will have to wait to see how the rest of the month shapes up. Typically, exports tend to be skewed towards the second half every month.

News reports indicate that India may cut its oil imports from Iran by half to secure a waiver from the US to continue with the shipments. “In the absence of waivers, Indian refiners will have to seek alternatives that are likely to be more expensive," says the Edelweiss report.

Not only that, if the sanctions result in a sharp drop in Iran’s exports eventually, then there is a case for an increase in global oil prices. Demand is strong. Venezuelan crude oil production is in dire straits and will add to supply-side woes. Also, it remains to be seen whether other oil producers can compensate for the lack of supplies. From now on, oil prices will be driven by these factors.

India’s macro position would worsen if oil prices were to shoot above $80/barrel, said Kotak Institutional Equities in an 8 August report. A $10/barrel change in the crude oil price results in 50 basis points impact on the current account deficit expressed as a percentage of gross domestic product and 30 basis points impact on inflation, according to Kotak.

One basis point is one-hundredth of a percentage point.

There is also a modest impact on gross fiscal deficit through higher subsidies on kerosene and liquefied petroleum gas. The gross fiscal deficit could also increase in case the government decides to reduce tax on petroleum products (diesel, petrol) in order to alleviate the impact of higher crude oil prices.

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