A match has been going on in global oil, which has stayed largely out of the spotlight as the world focuses on the pandemic and its effect on demand. The match only recently garnered attention as the players dropped all pretense that they were not playing. Earlier this week, Saudi Arabia said it was hiking the official selling prices for its oil for Asian buyers. In response, India ordered its state refiners to reduce their purchases of Saudi oil. The game is on.
OPEC’s largest producer announced the price hikes for Asian buyers days after OPEC+ agreed to start adding barrels to their daily output, reducing a production curb that has had India repeatedly protesting against what it calls an artificial way of keeping oil prices high. Next month, Asian refiners and traders will have to pay $1.80 above the Oman/Dubai benchmark average for shipments of Saudi crude.
From one perspective, the Saudi move could be an attempt to keep revenues from its biggest market stable even if prices fall on the back of higher production, including from exempt OPEC members Libya and Iran, both of which are ramping up production.
From another, the move could be a warning to India to think twice before diversifying into other suppliers because price is not the only consideration when it comes to oil imports, Karunjit Singh from the Indian Express wrote in a recent analysis on the topic, citing energy experts.
“This incident shows that there is not just the price of crude, but terms like shipping and flexibility of contracts which producers can push back on if importers try to diversify their source of supply,” said one India-based analyst as quoted by the Indian Express.
Related: OPEC+ Was Wise To Ease Output Cuts Despite Demand Concerns
And yet, in response to the Saudi price hike, New Delhi told its refiners to reduce their orders for Saudi oil for May, which they promptly did. Indian refiners will now buy 36 percent less Saudi crude next month than earlier planned. That would amount to some 9.5 million barrels in total for four big state-owned refiners: Indian Oil Corp, Bharat Petroleum Corp, Hindustan Petroleum Corp, and Mangalore Refinery and Petrochemicals.
This compares with 10.8 million barrels planned to be purchased before the price hike, but it also compares with an average monthly import rate of 14.8 million barrels from Saudi Arabia for the four refiners. The ball seems to have landed in the Saudi court.
What the Kingdom has going for it is its proximity to India, which keeps the cost of shipping the crude there low. It is also flexible in terms of production as it has proved time and again when it feels threatened by a fellow producer, most recently—last year—Russia. The sheer size of its production capacity is also an advantage over smaller producers.
On the other hand, India—and the other big Asian oil importer, China—has the pick of the litter, and it’s a growing litter. Last year, for instance, India’s top oil supplier was Iraq, but the time this February rolled around, it had been replaced by the United States. The subcontinent is also importing crude from the Central Asian countries, Africa, and Latin America. This month, India also bought its first cargoes of Norwegian crude, from the Johan Sverdrup field, at a total of 4 million barrels, two to be delivered in May and two in June.
India is diversifying away from Middle Eastern—read Saudi—oil, and it has a good chance to score a big point against its opponent in the match, even if inadvertently in part: a rise in new Covid-19 infections on the subcontinent this week pressured prices. This rise couldn’t have come at a worse time for Saudi Arabia: some analysts saw the Saudi Asian price move as a signal of its confidence in the recovery of Asian oil demand. Indeed, demand has been recovering in both China and India—the world’s first- and third-biggest oil importers—but any news of a surge in infections is enough to reverse the positive effect of that recovery on oil prices.
Indian imports most of the oil it uses. At 80 percent, the share of imports in its consumptions is uncomfortably high. Of this total, however, as much as 60 percent comes from Middle Eastern suppliers—again, an uncomfortably high degree of dependence on a single, and united, group of producers.
“We have asked companies to aggressively look for diversification. We cannot be held hostage to the arbitrary decision of Middle East producers. When they wanted to stabilize the market we stood by them,” a New Delhi government source told Reuters in early March, noting India did not cancel any OPEC cargos last year despite the destruction of demand.
The spat shows how divergence between the interests of oil buyers and those of their suppliers has deepened amid the pandemic. This is by far not the first time Saudi-led OPEC has capped production to prop up prices, but India has not been so vocal in its opposition to such moves. Now, however, with economic recovery extra-fragile and the pandemic far from over, price sensitivity has boomed, it seems.
The good news for buyers such as India is that supply is ample and getting ampler: Guyana has joined the exporters’ club, and India already has plans to start buying oil from the newcomer. The bad news is that diversification will cost it higher prices, which, according to the government, will be worth it, ultimately.
The good news for Saudi Arabia is that its production prices are still lower than most other suppliers’. The bad news is that it may have used its price weapon prematurely, overconfident that India has few other import options. At some point, therefore, the Kingdom may have to choose whether it prefers a larger market share in the world’s third-largest importer of crude or whether it would bet on higher prices and fewer sales.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Forget OPEC Production Cuts, It’s Exports That Matter
- World’s Largest Lithium Producer: Get Ready For A Mega-Rally
- U.S. Oil Production Is About To Climb