The Crude Report: Iran crude to India post sanctions

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Indirect talks between Iran and the US have not yet resolved disagreements over a roadmap toward lifting US sanctions and enforcing Tehran's nuclear compliance. But refiners are watching the developments closely, and the eventual lifting of US sanctions is expected to trigger a revival in Iranian crude oil sales to Asia.

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Transcript

Azlin Ahmad: Hello, everyone. Welcome to this episode of "The Crude Report." I'm Azlin Ahmad, Asia Pacific, and Middle East crude markets editor. With me today is our crude and products reporter in Mumbai, Sathya Narayanan, who will be joining us for this podcast. We are going to discuss how Indian refiners feel about restarting purchases of Iranian crude when U.S. sanctions are lifted. Now, indirect talks between Iran and the U.S. have not yet resolved disagreements over a roadmap toward lifting U.S. sanctions and enforcing Tehran's nuclear compliance. But refiners are watching the developments very closely and the eventual lifting of U.S. sanctions is expected to trigger a revival in Iranian crude sales to Asia. Now, with India, Sathya, tell us a little bit more about India's imports of Iranian crude before the latest imposition of U.S.-led economic sanctions in late 2018. I believe at the time India was the second-largest Asia Pacific buyer of Iranian crude just behind China. Can you give us some idea then of the volumes that India imported in 2017 and roughly what percentage of India's total imports the Iranian crude contribute at the time?

Sathya Narayanan: Hi, Azlin. Sure. India is the world's third-biggest oil consumer and imports about 80% of its crude needs. It depends a lot on Middle Eastern crude. Prior to the imposition of U.S. sanctions, India imported an average of 489,000 barrels per day of crude oil from Iran in 2017 which accounted for about 11.3% of the overall imports that year. When the sanctions were imposed, India was one of the few countries to get waivers to continue importing crude from Iran. The shares of Iranian crude, however, fell to 2.8% in 2019 when Indian refiners stopped importing crude from the Middle Eastern country. This was because the waivers were not actually extended by the United States. So since 2019, India has not imported any crude from Iran. Well, most of the Indian refiners have now expressed interest in resuming purchase of Iranian crude once sanctions are lifted, but the volume might not be as high as they were earlier.

Azlin: So what do you think are some of the key factors that will encourage Indian refiners to resume their purchases of Iranian crude when U.S. sanctions are lifted? Is it simply the price?

Sathya: Well, not exactly. Iran used to offer good terms such as extended credit or 60 days credit period while other Middle Eastern countries don't. Another benefit of Iranian crude is shorter voyage savings on freight costs. This encouraged Indian refiners to opt for Iranian grades in the past and the refiners are now expecting Iran to offer similar or even better terms. Also, increased supply from Iran would ease the global prices. India has been trying to diversify its crude basket as Opec failed to ease supply curves, which, of course, have increased global prices. So Iranian crude, amid other benefits, could be a welcome addition to the overall import basket. Well, one more reason to prefer Iranian crude is Indian refiners are well-equipped to process Middle East crude grades so Iranian crude would fit in without any technical difficulties.

Azlin: Could Indian refiners actually import as much Iranian volumes as they did before the latest sanctions were imposed?

Sathya: Well, it depends on their needs, of course, because, you know, HPCL had mentioned that they would have to wait to understand their need, depending on the time of lifting of the U.S. sanctions and, of course, the season. For example, they would prefer bituminous crude during non-monsoon season. One more refiner, state refiner, BPCL, has said that they would like to visit the 2 million tons per year figure, which is about 40,000 barrels per day once sanctions are lifted. So it majorly depends on their needs.

Azlin: And if Indian refiners resumed taking Iranian supplies, what kind of crudes could they potentially back out? Would it be mainly the grades from Saudi Arabia, the UAE, and Iraq, or could it possibly be crudes from other suppliers as well?

Sathya: Actually, this is a little difficult to answer as none of the refiners have expressed any intent to break any of the term contracts such as the one they have with Saudi Aramco. A few Indian refiners have said they would reduce the spot purchases to include Iranian crude. For example, BPCL would displace U.S. [inaudible 00:04:52] with Iranian crude if sanctions are [inaudible 00:04:54] this year. With that as the case, one can actually assume that any grades procured on a larger quantity in spot grades could be off their basket. However, generally speaking, Abu Dhabi's Upper Zakum, Qatar's Al Shaheen is similar to Iranian crude grade. So it won't be surprising if Indian refiners reduce the intake of those grades and other similar ones to accommodate the Iranian one.

Azlin: So the talks aimed at reviving the 2015 nuclear deal and lifting U.S. sanctions on Iranian oil exports seem to have stalled at the moment. If and when the deal is rich and sanctions are lifted, Iranian crude exports may rise more quickly than actual production because apparently, Iran has supplies in storage. Iran has built up almost 150 million barrels of crude and condensates in onshore and offshore storage according to data intelligence from CAPLA. Around half of this is already on the water and could theoretically be sold into the market almost immediately. Now, Sathya, from your discussion to the Indian refiners, do you get the impression that they could be among the first buyers of Iran crude as soon as sanctions are lifted, or would they prefer to wait for other countries to buy first?

Sathya: Sure, Azlin. So India was one of the largest consumers of Iranian crude. You know, from what I'm hearing, India could be one of the first few to buy from Iran if U.S. sanctions are lifted. India wanted to continue their purchase in 2019 but had to stop as the U.S. waivers to continue importing from Iran were not renewed. Major refiners have already expressed their interest in buying from Iran. Their refineries are perfectly equipped to handle Iranian grades and with increased demand for transportation fuel, Indian refiners may not wait for other countries to buy first. This, of course, if the economic evaluation of the crude favors them. Well, also, Delhi has not been happy with the rising global benchmark prices and the oil minister had accused Saudi Arabia of maintaining Asian oil premium in the past. So the urge to expand and diversify the Indian crude purchase basket as I previously mentioned is another reason for the refiners to consume Iranian crude. I just want to give some perspective on the diversification. So India's biggest state-controlled refiner, Indian Oil Corporation, recently purchased Liza crude from Ghana. Another state refiner had bought about 40 different grades in the last fiscal year alone, which in India is fiscal year 2020 to 2021. So Indian definers are very serious about expanding their crude oil basket.

Azlin: Yes. That's a very good point. I think that the Indian refiners have always said that they prefer not to be too dependent on a single region or just a few suppliers. Now, the Indian state-controlled refiners have so far been increasing run rates recently as many parts of the country slowly emerge from strict lockdowns following a slump in new Covid-19 cases. But as of end June, many of the Indian refiners were still running only at about 90% of capacity. Do you think these relatively low refinery rates may limit the amount of Iranian crude that India could import when sanctions are lifted? Do you think Indian fuel demand will rise quickly enough to allow the refiners to boost rates? And would you have any thoughts about when you think Indian refinery runs will go back to 100% or even slightly above 100%?

Sathya: Well, to be honest, yes, indeed. You know, the demand has been coming back a little bit in India. For instance, I can give you data compiled by state-controlled refiners which says that India's fuel consumption recovered in June from May. And, of course, this data, you know, which the state-controlled refiners compile will account for around 90% of the country's fuel sales. Well, mobility data also showed that driving activities has increased and is better than May after many states eased lockdowns. With that, market expectations or that demand will grow from here. Also, India's oil minister believes that fuel use will return to pre-pandemic levels by end of this year while Hindustan Petroleum Corporation expects consumption to recover from this month. Though it may take some time to get back to pre-pandemic levels seen in 2019, demand for motor fuel will definitely grow if there aren't anymore lockdowns.

That being said, one headwind for consumption would be rising retail fuel prices. Gasoline prices alone in Mumbai is over 105 rupees per liter, which is roughly $1.40 per liter and the rates have crossed the 100 rupees mark for the first time they were in early June. Also, diesel is being sold at around 97 rupees per liter. Now, getting back to your question on refinery operations, state-controlled refiners are operating between 85% to 90%, as you mentioned, of the total capacity. With the increasing demand for motor fuels, refiners should be increasing crude runs soon and they are capable of increasing Iran's in a span of few days. So it won't be a surprise if we see high Iran rates when the U.S. sanctions are lifted.

Azlin: So we have come to the end of this podcast. It was really great to walk through the future of Iranian crude sales into India with our Mumbai crude and products reporter, Sathya Narayanan. Thank you very much, Sathya. For more in-depth coverage of the global crude and oil products markets, consider subscribing to Argus Global Markets. You can find more information on this service at www.argusmedia.com. Thanks for tuning in, and we look forward to you joining us on the next episode of "The Crude Report."

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