Slippery, but this ain’t crude

Amb. Sujan R. Chinoy Director General, IDSA Click here for detailed profile

Shebonti Ray Dadwal Former Senior Fellow, IDSA Click here for detailed profile

Crude oil prices have firmed up after the Significant Reduction Exemption (SRE) waiver granted by the US to eight nations, including India, allowing them to import gradually diminishing quantities of oil from Iran, ended on May 2. The hardening of prices is inevitable if additional oil supplies do not reach the market to compensate for the approximately 1.3 million barrels per day (mbd) reduction in Iranian oil.

Iranian supplies had risen to 2.5 mbd after the sanctions were lifted in the wake of the Joint Comprehensive Plan of Action. The US aim is to put pressure on Iran by cutting off its oil revenue, and speculation is rife that a key objective is to effect regime change.

Not Well-Oiled

Although US President Donald Trump has stated that Saudi Arabia and the UAE can make up any shortfall up to 2 mbd, the loss of Venezuelan and Libyan supplies may also have to be factored in.

Russia has made it clear that it will not increase output. There are conflicting reports whether the Organisation of the Petroleum Exporting Countries (Opec) will enhance production. Saudi Arabia is reportedly capable of meeting the increased demand, though it would be loath to see any price slump. As for the US, it is already exporting 2.5 mbd and may not be able to pick up the slack on its own.

There is speculation that China will continue to source oil from Iran through barter trade. Apart from being the world’s largest importer of oil and a vital supplier of oil and gas modules, China is also a key geostrategic player in the global energy markets with strong ties to all major producers. China is unlikely to fall in line with the US demand and risk its credibility, particularly at a time when tensions with the US are on the rise and China is making every effort to provide an alternative narrative on developmental issues.

China may be willing to consider yuan-denominated transactions or barter trade with Iran, with the latter getting Chinese goods, machinery and perhaps even arms in return. This may help China keep intact its own prestige and ties with Iran, while keeping its banking and financial institutions outside the pale of US retaliation.

India imported 23.5 million tonnes of Iranian oil in 2018-19, making it its third-largest source of crude. India has not contracted any oil from Iran for May. Unlike many others in Asia, Indian refineries are technically capable of processing all grades of crude.

Being a coveted market, many countries, including Iran’s Opec rivals as well as the US, have offered to fill any gap left by Iranian oil. But other suppliers may not provide the same credit and insurance facilities as Iran does.

Moreover, with ongoing general elections, the government can ill-afford a rise in oil prices and consequent increase in the oil import bill, or any potential downward pressure on the value of the Indian rupee. It is expected that around 200,000-300,000 barrels per day of rebranded Iranian oil will find its way to markets through ‘friendly’ countries.

Iran has also taken steps to ensure that its oil remains attractive by offering to settle payments in its own currency (rial) or in foreign currency other than the US dollar, that too at discounted rates through the Iran Oil Exchange (Irenex).

By the barrelful

Further, it offers the option of allowing small private firms to evacuate the oil through smaller cargoes, thus circumventing the involvement of Iran’s oil ministry with which major companies may be reluctant to do business. Buyers would subsequently be in a position to export Iranian cargoes to any other country.

There is speculation that President Trump might yet extend the waiver on a case-by-case basis. According to some analysts, certain countries may be allowed to place future orders for Iranian oil. They might then be allowed to insure, transport and refine Iranian oil allowed under the 2012 Iran Freedom and Counter-Proliferation Act, which provides legal authority to impose sanctions on Iran’s petroleum industry and foreign countries that do business with it, but also allows for penalties to be waived.

The situation remains fluid, with a number of possibilities. What appears clear is that China is most unlikely to fall in line.

While India is not as large a player as China in the oil market, it does have key geostrategic objectives in the region. Foremost among these would be the need to continue to maintain traditionally friendly relations with Iran.

This would require India to tread a fine line and continue to balance its ties with both Iran and the US on the one hand, and with Iran and Saudi Arabia on the other. This will only be possible if India continues to source some oil from Iran in the future, the US withdrawal of the SRE waiver notwithstanding.

This article was originally published in Economic Times