While the reported strikes by 10 drones at Abqaiq and Khurais oil facilities, disrupted more than half of Saudi Arabia’s oil capacity or 5.7 million barrels per day (mbpd), the enormity of the situation can be gauged from the fact that it is being termed as the far worst shock to global supplies than when Saddam Hussein invaded Kuwait in 1990 and 1979 Islamic Revolution in Iran.
“Yesterday, Saudi Aramco officials informed the Indian refiners that there would be no shortage of supplies to them. MoPNG (Ministry of Petroleum and Natural gas) is closely monitoring the situation in consultation with Indian refiners and Saudi Aramco," said an Indian oil ministry spokesperson on Monday.
International benchmark Brent crude futures soared $11.73 to $66.91 per barrel. US West Texas Intermediate crude futures jumped $8.49 to $59.76 per barrel. Some traders worldwide are speculating if oil prices will cross the $100-mark yet again. Extreme volatility has marked crude oil prices, hitting a record $147 per barrel in July 2009.
“The largest-ever disruption of crude production in Saudi Arabia amid drone attacks on its key facilities may keep oil prices elevated in the near term. Global oil supplies may be adequately met through large inventories and strategic reserves; however, moderation in oil prices will depend on full restoration of Saudi’s production, which may at least take a few weeks," Kotak Institutional Equities Research said in a report on Monday.
The oil price spike for India comes amid a slowing domestic economy, adverse external headwinds such as the US-China trade war and fears of a global recession.
The geo-political event has also raised the fears of an increase in transportation fuel prices in India which in turn may amplify the demand for return of state control on fuel pricing in India.
“We do not rule out a possibility of moderation in marketing margins on auto fuels—a US$10/bbl rise in global crude and product prices may require OMCs to increase retail price of diesel and gasoline by ₹5-6/liter in the following fortnight. Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss," the Kotak Institutional Equities Research report added.
A sudden increase in global prices will affect India’s oil import bill and its trade deficit. Every dollar increase in the price of oil raises the import bill by Rs10,700 crore on an annualised basis. India spent $111.9 billion on oil imports in 2018-19.
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 per barrel in FY17 and FY18, respectively, was $59.35 in August 2019, according to data from the Petroleum Planning and Analysis Cell (PPAC). The average price was $59.35 a barrel on 13 September. Indian basket of crude represents the average of Oman, Dubai and Brent crude.
In June last year, India’s three government-run oil marketing companies—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—introduced dynamic fuel pricing, joining countries such as the US and Australia, where fuel prices change daily depending on global oil price fluctuations.
However, the NDA government had earlier effected a ₹2.50 per litre cut in prices of petrol and diesel to ease inflationary pressure and boost consumer confidence.
With the drone strikes disrupting around 5% of the global oil supply and further exacerbating tensions in the Persian Gulf; India is keeping a close watch on the rapidly evolving situation. Elections are due in Maharashtra, Haryana, and Jharkhand later this year and in Delhi early next year. The Bharatiya Janata Party (BJP) is in power in all of these states except Delhi.
Saudi Arabia accounts for around 10% of the total global supply of 100 mbpd and is the second largest supplier of crude and cooking gas to India. India is particularly vulnerable as it is the world’s third-largest oil consumer — importing more than 80% of its oil requirements and around 18% of natural gas.
“Further escalation of geopolitical tensions may add to supply woes. Any further escalation of geopolitical tensions in the middle-east region, which cannot be ruled out for now, may add to the woes of global oil supplies for now given lack of buffer from Saudi’s significant spare production capacity. We note that crude supplies from Iran and Venezuela have already been curtailed significantly amid sanctions from the US, while supplies from Libya and Nigeria have also shown vulnerability to disruptions in the recent times," the Kotak report said.
Lower oil prices had dramatically improved India’s terms of trade, thus boosting India’s gross domestic product (GDP). Any advance in global markets is bound to impact India’s oil import bill and trade deficit.
“Any further escalation of geopolitical tensions in the middle-east region may add to the woes. Spike in crude prices, even if temporary, will be negative for downstream OMCs and positive for upstream PSUs and GAIL," the Kotak Institutional Equities Research report added.
Saudi Aramco also holds importance for India’s energy security architecture. In the backdrop of its global IPO, Aramco has partnered to jointly develop the massive refinery and petrochemicals complexes in Maharashtra. In a deal valued at $15 billion, the Gulf nation’s national oil company is also in the process of buying a 20% stake in the Reliance Industries Ltd flagship chemicals and refining business.