The blasts resulting from a drone attack on Saudi Aramco’s Abqaiq facility has sparked another crisis globally, but how does it impact India?
On 14th September of this month, a series of drone attacks on the world’s biggest oil producer rocked the global economy. The attack hit Saudi-owned Aramco’s Abqaiq facility. Consequently, the attacks put a temporary plug on the plant which produces 5% of global oil supply.
The Abqaiq facility has suspended production of 5.7 million barrels of oil per day.
Abqaiq is a Saudi Aramco gated community that is also the world’s biggest oil processing facility. It is located in the Eastern Province of Saudi Arabia. The plant processes 7 million oil barrels per day, which are later exported around the globe.
The US accused Iran of the attack
Mike Pompeo, the US secretary of state, accused Iran of the attacks on Abqaiq facility and Khurais oil fields (one of the kingdom’s largest oil fields). The massive assault on the Saudi oil fields has brought the US relations with Iran to an all-time low.
Furthermore, the attack has affected the production of 2 billion cubic feet (56.6 million cubic meters) of natural gas per day. Iran’s Foreign Ministry outrightly denied any involvement in the unprecedented attacks. Moreover, he also warned the US to check its military assets in the region that are within the range of Iran’s missiles.
The US accused Iran of supporting the attack carried out by Yemen’s Houthi Rebel group which has taken responsibility.
President Trump tweeted that the US is “locked and loaded” and waiting for the Kingdom to verify who attacked Saudi’s oil fields. They will then discuss the terms under which the two allies will further proceed.
How the Saudi Aramco blasts impact the global oil supply and India?
Saudi Arabia is considered to be the crucial source of energy, including crude oil and natural gas for India. It also stands to be the second-largest supplier to India after Iraq. The blasts at the Saudi-owned facility will have a huge impact on India’s oil prices.
On Monday, oil prices spiked as much as 20% in the wake of this assault to reach a six-month high.
This spike in global crude oil prices will hit India’s trade deficit and oil import bill. Likewise, the impact will be felt by all the major countries that are India’s significant suppliers.
As per a Livemint report, every dollar increase in the oil price will affect India’s import bill by an increase of Rs. 10,700 crore per year.
India in 2018-19 was spending around $112 billion on oil imports.
India also stands to be the world’s third-largest oil consumer, forcing India to import more than 80% of oil and 18% of natural gas. This all-time high of oil prices will come as a big blow to India.
The country is already experiencing a slowdown in its domestic economy. And with industries hitting new lows amid fear of global recession by Sino-US trade war, prices are expected to go up.
India current oil market
Till the first quarter of the financial year, India imports 4.5 million barrels per day of crude oil which is 0.1 less as compared to the last Q1 of the previous fiscal year.
However, despite this decline in the demand for crude oil import, the consumption based on the import has increased from 83.4% to 84.9%.
As per Livemint article, Jefferies India Pvt. Ltd. calculated that by noon, Brent crude prices jumped up by 10% at $66.3 per barrel and by every $1 increase in Brent crude price will boost the annual earnings by 2.5-2.9%.
On Monday, the crude oil price increased by $6, which was expected to boost the income of ONGC and Oil India by 15-17.5%, but investors are not getting the benefits out of Brent crude demand hike.
ONGC shares only gained 0.05% and Oil India shares fell by 0.5 %, Indian Oil Corp. Ltd. (IOCL) fell by 2.6%, Bharat Petroleum Corp. Ltd. (BPCL) and Hindustan Petroleum Corp. Ltd. (HPCL) fell 6% each.
India’s import demand in 2020
According to an article by Care Ratings, India has already consumed 5.1 million barrels per day in 2019 till date. Moreover, if this continues, the Indian government is expecting a fall by $1.1 of import of crude oil and fall by 1.2% in consumption in the 2020 financial year.
The further intensifying situation is going to play a significant role for India in the OPEC+ (OPEC and its allies) meet in December 2019. OPEC is planning to initiate deeper production cuts in 2020.
India’s contingency oil reserves
However, India is already maintaining Indian Strategic Petroleum Reserve (ISPRL) that manages emergency oil reserves in the country. It has a stockpile of around 5.33 million tons of underground storage which can help India to meet 9.5 days of the country’s oil requirement. It is still not enough for India as the demand keeps on rising.
India’s oil reserves include Visakhapatnam (1.33 million tons), Mangalore (1.5 million tons), and Padur (2.5 million tons).
Furthermore, two new sites are under construction, one at Chandikhol in Odisha to reserve 4 million tons and second to make an additional site at Padur to reserve 2.5 million tons which will increase the contingency reserves of India to meet the demand for 21 days.
Sanctions on Iran and Venezuela affect Indian oil demands
India’s strategic planners are concerned over supply disruptions for the short term. Moreover, the US government has already imposed economic sanctions on Venezuela and Iran. Incidentally, both the countries are the two biggest export sources of crude oil to India.
The US is trying to persuade and sometimes order the nations around the globe to follow their rules. The US holds the reins of 25% of the world’s economy which enables them to put multiple trade sanctions.
Iran and Venezuela are countries which can help India to come out of this contingency situation. Therefore, this presents a testing diplomatic problem for the Modi Government.
However, the US president assured that he had authorized the US strategic Petroleum Reserve to release oil if needed. Trump instructed agencies to expedite approvals of oil pipelines projects in Texas. He also instructed various other states to meet the global supply of oil. Furthermore, Saudi Arabia is now planning to use its oil reserves to tackle the export demand.
Markets plunge; Rupee sinks further
The Indian economy is already feeling the effects. While investor sentiment significantly weakened, the expected surge in oil prices took the markets down.
Global oil benchmark Brent crude dropped 0.27 percent to 67.28 per barrel.
With geopolitical uncertainties weighing in, Rupee slid 105 paise to 71.97 per US dollar. India’s benchmark equity Sensex saw red and plunged 642 points in the aftereffects of the Saudi Aramco blasts. Auto stocks like Maruti Suzuki, Tata Motors, and Hero Motocorp were among the top losers.
As per a Nomura report, if import cost of oil blows up, it could worsen India’s ‘current account position, compress profit margins and raise inflation’. Upcoming trade talks between the US and China are the only ray of hope for markets. Further, a policy meeting of the Federal Reserve will try to improve the global market sentiment.
