Could it be that US President Donald Trump was right after all? In his usual forthright fashion Trump insisted that oil prices would rapidly return to the levels they had been at before the US-Iran war turned the world upside down.
On Friday the Brent crude index dropped two dollars to $71 and before that on Thursday it had fallen from $75 to $73. On the day the war started crude prices were at $72-$74.
Iran’s also keen to leap back into the global market now that the US has unsanctioned its crude and other oil products for 60 days. The Iranian oil minister met India’s oil minister Hardeep Puri on Thursday but it’s still thought that India won’t be buying just yet.
The reason why India isn’t likely to be in the market for Iranian oil isn’t tough to understand. There’s still a big question mark hanging over the country’s black gold. The US government’s Office of Foreign Assets Control (OFAC) has lifted sanctions only for 60 days. What happens after is not clear. Will there be an extension or could the sanctions waiver be snapped shut?
Also India has been snapping up oil from countries around the world and has now fully met its needs for July and the first half of August.
“I wouldn’t expect any meaningful crude deal in the near term… India is unlikely to commit to Iranian crude imports while US sanctions/ unsanctions policy flip-flops remain in place and the geopolitical situation remains highly fluid,” says Sumit Ritolia, senior analyst at Kpler, the data and analytics firm.
He adds: “Refinery planning cycles typically run 2-3 months ahead, meaning many (Indian) refiners have already lined up imports through at least the first half of August.”
In June India looks likely to be getting more than 40 per cent of its imports from Russia. The estimates are that India is buying about 2.3 million barrels to 2.4 million barrels (mbd) of Russian oil which is close to its peak levels of buying from producers in that country.
India has been scouting in the global market for as much crude oil as possible and has increased purchases from the US, Nigeria, Venezuela and even Brazil. “Importers are already locked in with crude imports till August,” says Ritolia.
At another level, about 150-170 ships have exited the Gulf region via the Strait of Hormuz in the last 3-4 days. This is still lower than the 110-140 ships that usually cross through daily.
At the last estimate about 11 ships have exited the Gulf and are heading to India. That includes two ships carrying LPG.
There’s thought to be around 88 million barrels of Iranian oil currently at sea in tankers. These are mostly in the South China Sea and other locations closer to China. Because of shorter sailing times, Iran would probably find it easier to sell these cargoes to China or other Asian buyers including India. Most European countries would probably not purchase Iranian oil in the current situation.
The global crude oil market has also reacted in unexpected ways to the closing of the Strait of Hormuz in the last 100 days since the war began. The shortages have not been as huge as had been expected for a variety of reasons. One key factor has been that China has cut its oil usage sharply. According to some estimates China’s oil consumption has dropped by one-third. What has suddenly triggered this demand fall is not clear though analysts point out that the country has a huge number of electric vehicles on its roads.
Equally crucially, Chinese industries have undergone a sharp slowdown in the last year. This includes key sectors that are heavy power consumers like steel and cement. Construction activity has also been at much lower levels.
In addition to all this, China appears to have drawn on its own huge strategic reserves rather than buying expensive US crude. India, by contrast, has more than doubled its purchases of WTI Midland oil from the US. Amongst the big Indian refiners, the biggest buyer has been IndianOil.
More importantly, India is buying around 1 million metric tonnes of LPG from the US.
Iran is, however, keen to sell crude and other products to India. Analysts who cover the sector say that executives from the National Iranian Oil Co contacted major buyers like India, Korea and Japan even before the US sanctions were officially lifted.