Will oil premium paid by India end?

Thu, 30 Jul Pre-Open

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Presently, there is an oversupply of oil of 2m barrels per day. The Organization of the Petroleum Exporting Countries (OPEC) has remained adamant to cut the production of oil. The reason behind OPEC allowing prices to fall is attempting to fight off competition from US shale oil and maintaining its share in the US market. Keeping prices below US$ 100 per barrel has put pressure on higher cost US shale producers and could prevent further erosion of OPEC's position in America. The easing of sanctions on Iran's oil industry would put further pressure on the market which is already oversupplied. Further, there has been concern regarding economic health of China, one of the world's top energy consumers. If there are signs of slowdown in China in the coming months then the oversupply situation will get worse.

India almost imports 80% of its crude oil requirements. If everything else remains same, with the oversupply of crude oil, oil price is likely to come down. According to the officials at the Indian oil ministry, every dollar drop in oil prices will help reduce the government subsidy burden by US$ 1 bn. Lower crude prices would bring down imports and government subsidy bill. It would help to bring retail inflation below 5% and might provide room for the RBI for further rate cuts.

Premium from Asian buyers

Currently OPEC charges a premium on sale made to the Asian countries. For decades, India and other Asian countries have paid a price of up to US$ 5 per barrel more than the US or European refiners to OPEC. But in the past few years, the premium has greatly eroded with Asian demand, led by China and India, expanding and refiners asserting themselves. Some bit of it, however still remains. Mr. Pradhan, the minister of petroleum and natural gas addressing the 6th OPEC International Seminar said that there is a strong feeling for the Asian countries like India should receive an Asian dividend rather than paying Asian premium while making bulk purchase of crude.

Going forward

Earlier, crude flow was from West Asia to North America and the pricing also depended on the US market. Now, with the shale revolution, the flow has shifted to Asia. Since the flows have now changed, we are observing in the last few months that the prices we seem to be getting are better than the other markets. The dynamics of business have changed. It is no longer a supplier's market, but it is a buyer's market. We believe, the reduction of premium and oil prices by OPEC to Asian countries like India will help a lot by reducing the subsidy burden and the current account deficit as India imports 85% of its crude oil requirements from OPEC.