Analysis: India’s growing affinity for US crude may trigger more term deals

India is witnessing a dramatic surge in US crude inflows and volumes could rise further as refiners look to seal long-term and spot deals to ensure steady supplies and cushion the impact from any potential disruption because of rising geopolitical tensions, analysts told S&P Global Platts.

India’s voracious appetite for US crude is already visible in the latest numbers from the US Energy Information Administration. The country imported 263,000 b/d of US crude in Q1 2019, an eightfold jump from as low as 33,000 b/d in Q1 2018. Inflows so far this year have also been more than double the 2018 average of 131,000 b/d.

“India had already hiked imports from the US this year and we expect this will go even higher, particularly with the absence of Iranian crudes and as China reduces its US crude oil intake significantly because of trade tensions,” said Kang Wu, head of Asia analytics at S&P Global Platts Analytics.

Senthil Kumaran, consultant at Facts Global Energy, estimated that India could end up 2019 with average US crude imports of as high as 190,000 b/d.

“As the US has taken a harder stance on Iran and Venezuela, Indian refiners are more exposed. While US barrels are no one-to-one match for Middle East and Latin American grades, Indian refiners will still have to take more US inflows. This is because the bulk of the incremental crude production for the next few years will happen in the United States,” he added.

Kumaran said while state-run refiners like Indian Oil Corp. would aim to raise term volumes for US crude and possibly roll over their term contracts to the next fiscal year, private refiners like Reliance would buy more spot US cargoes.

“Of course arbitrage will be the deciding factor but we will see US crude volumes growing at an even faster rate,” he said.

Even other state-owned refiners like Hindustan Petroleum Corp. Ltd. and Bharat Petroleum Corp. Ltd. might look towards term contracts for US crude this year, but for relatively smaller volumes, he added.

ENERGY DIPLOMACY
With US-India crude flows rising, Washington and New Delhi are trying to ensure that more opportunities open up to facilitate oil flows. Immediately after taking charge as Petroleum Minister for the second time, Dharmendra Pradhan called US Secretary of Energy Rick Perry to express his interest to enhance energy cooperation.

“The emergence of the US as a source for oil and gas for India also figured during the call. Both ministers agreed to work closely to improve the overall engagement between the countries in the energy sector,” Pradhan said.

US crude oil exports totaled 2 million b/d in 2018, up from 1.2 million b/d in 2017. Asia accounted for 45% of all US crude exports in 2018, up from 36% in 2017, with India accounting for 14% of Asia-destined volumes last year. Platts Analytics expects US crude exports to surpass 3 million b/d in 2019, with approximately half of the volume flowing to Asia.

Private refinery sources in India said an improvement in US shipping logistics has whetted the appetite of many Indian refiners to buy American crude on a regular basis.

IOC so far is the only Indian refiner that has sealed a term deal for US crude. It will ship in up to 4.6 million mt of various US crude grades for delivery during the current fiscal year ending March 2020, a move that highlights the company’s strategy to diversify sources of term supplies.

FILLING THE IRAN VACUUM
The Trump administration has said it’s seeing “historic” compliance with Iran sanctions as the US continues to drive Iranian oil exports to zero.

Iranian crude oil and condensate exports, which averaged about 1.7 million b/d in March, fell to about 1 million b/d in April and an estimated 800,0000 b/d in May, according to S&P Global Platts cFlow trade flow data and shipping sources. The majority of those flows in May were to China, Turkey and Syria.

“We have not signed any crude supply contract with Iran this year,” said one IOC official in India.

Another IOC official added: “Our plan is to widen our crude sourcing base beyond traditional suppliers. Sourcing US grades from the spot will be part of this overall strategy.”

An official at state-run refiner HPCL also said the company would aim to keep its crude sourcing portfolio diversified as far as possible to absorb any temporary shocks in oil price because of geopolitical tensions.

“The surprise move in late April by the US of not renewing Iran sanctions waivers after May has sent Indian refiners scrambling for replacement barrels to make up for the supply shortfall,” said Wu from Platts Analytics.

“In addition to increasing imports from other Middle Eastern countries, particularly Saudi Arabia, to replace Iranian barrels, India is increasingly looking to the US for additional supplies,” he added.

Iranian crude exports to India had been robust before the current sanctions were implemented in November 2018. But imports fell to around 190,000 b/d in Q1 2019, down sharply from 440,000 b/d in Q1 2018, according to Platts Analytics.

Risk levels associated with shipping crude oil via the Strait of Hormuz, the Middle East’s key shipping artery, have escalated recently after alleged attacks on tankers, pushing up shipping and insurance costs. This has posed challenges for key Asian buyers of oil from the Middle East, such as India.

Pradhan said he had received assurances from suppliers, such as the United Arab Emirates, for uninterrupted supply of oil and LPG despite recent disruptions in the Strait of Hormuz.
Source: Platts