India braces for US curbs on Iran crude, tries new channel

NEW DELHI: Amid trade war jitters, the US has just opened another front, asking all nations to stop buying Iranian oil by November 4 or face economic sanctions.

India, which buys a large share of its imports from Iran, gets no exemption, which can spell trouble; but analysts say things may not get as bad as it seems.

Economists talked to believe as and when the US slaps Iran with sanctions, India may resort to a rupee-rial mechanism, which may in fact help India save billions in forex reserves. New Delhi had worked out a similar arrangement with Tehran in the tough sanction days during 2010-14.

While most US sanctions against Iran take effect from August 6, others affecting the oil sector would come into force from November 4. US President Donald Trump in May withdrew from a 2015 nuclear accord with Iran and ordered re-imposition of sanctions.

Market watchers say India is not bound by the US sanctions.

While it may not be easy for India to completely substitute Iranian crude with supplies from elsewhere, State Bank of India has already written to Indian refiners and the government that it would not be able to handle oil payments to Iran from November 4.

Refiners use SBI and Germany-based Europaeisch-Iranische Handelsbank to buy Iranian oil in euros on a 60-day credit basis.

The government has not yet asked refiners to cut Iranian oil imports, but private players like RIL and Nayara (erstwhile Essar Oil) have already started cutting down on imports from Iran.

India may resort to rupee-payment for Iran’s oil. Tehran Times quoted External Affairs Minister Sushma Swaraj last month that Delhi only follows sanctions by the UN, and not by any specific nation.

“I do not see why India and Iran can’t resort to such a mechanism. We have done it in the past. If that happens, it will be favourable for India, as it will save us dollars. India is not a part of Nato, it is not bound by US sanctions. There could be some repercussions, but that’s a part of overall oil diplomacy,” says Sunil Sinha, Principal Economist, ICRA.

Sinha said geopolitical tensions of last few months has already impacted and raised crude oil prices.

Nearly 80 per cent India’s crude demand is met by imports and higher crude prices increase the import bill, widening current account deficit (CAD), which in turn can hurt the rupee. A rise in oil prices increases the government’s subsidy burden on cooking oil, kerosene oil and fertilisers and leads to spike in inflation, thus interest rates. Higher interest rates are bad for Indian companies.

Sinha said oil prices may not remain at the elevated levels as they would prompt US shale gas producers to ramp up production. Net-net, crude prices should average around $ 75 a barrel. The Indian economy is resilient enough to absorb it, he said.

Madan Sabnavis, Chief Economist at Care Ratings, said the exact impact of US sanction on Indian crude basket difficult to predict.

“Some substitution will take place. What matters is prevailing oil price. We may not have concessions from Iran in terms of price, but maybe in terms of payment method,” he said

Iran is India’s third-largest oil supplier. It exported a record 27.2 million tonnes of crude to India in FY18. Saudi oil minister said July output number would see a ‘measurable increase’ by hundreds of thousands of barrel a day.

Sabnavis said while OPEC countries have pledged to increase production, there is no clarity on which country will increase output by how much.

He said in 2017 OPEC had announced plans to cut crude production by 1.8 million barrels, but the actual shortfall touched 2.5 million barrels due to geopolitical problems in Venezuela and Libya.

Crude oil prices may moderate, but nobody knows by how many dollars,. While the supplies may not come down, market may react to sanctions on any of the oil-producing companies, Sabnavis said.

Some estimates show US sanctions could hurt Iranian crude production by 1 million barrels a day. OPEC members last week pledged to increase crude oil production by similar measure, but there is no clarity on how will they achieve it. It is not easy to increase production.

The US is relying on its ally Saudi Arabia to stabilise the oil market ahead of mid-term elections in the world’s largest economy in November.

Economists believe what Saudi Arabia, a leading OPEC player, will not deviate too much and its decision will be based on its own economic interest.

The next OPEC non-OPEC meeting will be held on December 4, but the members may meet in September to monitor and revisit progress.

At 11.30 am on Wednesday, Brent crude futures traded 0.28 per cent higher at $ 76.35 a barrel level. The Indian crude basked averaged at $ 75.31 barrel in May compared with $ 69.30 a barrel in April.