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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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India Taking Advantage Of Crude’s Weakness

If you’re looking for evidence that this is a great time to be a major oil buyer, look no further than India. Indian Prime Minister Narendra Modi maybe a friend to the U.S., especially as the two countries share a common threat in the form of an increasingly belligerent China, but the Indian Prime Minister is still happy to display an independent streak when it suits him. That independence is allowing Modi to cut outstanding deals on behalf of India for natural resources projects with a variety of sources around the world.

In May for instance, Modi traveled to Tehran to sign a deal with Iran and Afghanistan to develop a port on the Gulf of Oman. India will provide $500 million in financing for the port. While $500 million is a trivial amount of money for a major project in the U.S., in cash-starved Iran, it’s a major investment. India accounts for almost a third of Iran’s oil exports in recent months which explains Tehran’s interest in currying favor with Modi.

India is also cutting deals with the Russians – Indian oil company Oil & Natural Gas Corp (ONGC) bought a 15 percent stake in Russia’s Vankor oil field in a $1.3 billion deal, while 3 other Indian oil firms agreed to buy a ~24 percent stake in the field in June. Russia’s Rosneft owns the remainder of the field. Indeed, the Indians are reportedly interested in buying a major stake in Rosneft itself as well.

All of this activity reflects an important reality – oil is crucial to the future of India and India is crucial to the future of oil. For all of the talk about the rise of China, India will be a larger country than China within 5 years, India is growing faster than China, and India has significantly better demographics than China does. Related: Offshore’s Next Big Headache: Breakable Bolts

As a result of these factors, demand for oil is growing faster in India than just about anywhere else. That demand jumped 400,000 barrels a day in 1Q2016 to 4.4M bpd. That was almost a third of the increase in worldwide consumption. India’s car market is growing rapidly and sales are likely to keep moving higher as a larger and larger portion of the populace can afford motorized transportation for the first time.

Equally importantly, unlike many other large countries, India has very limited oil and natural gas reserves of its own. The country imports about 75 percent of the petroleum it consumes. That means domestic demand increases all directly draw from international suppliers like OPEC, Russia and U.S. shale producers. India is making moves to explore for more oil, but frankly the country will be lucky to keep domestic production on par with domestic growth as a percentage of total consumption.

The broader point here for investors is that India is capitalizing on crude weakness at an opportune moment. India sees the current environment as a great opportunity to secure energy supplies at advantageous prices for the future. Investors might consider following suit.

By Michael McDonald of Oilprice.com

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