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10 May 2018
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| Crude oil (The Total Investment & Insurance Solutions) |
US President Donald Trump’s move to reimpose
sanctions on Iran after more than two years of reprieve given to the Persian
Gulf country could keep global crude prices elevated in the short to medium term,
analysts reckon. Imminent production cuts by Iran come at a time when global
supplies are already hit by falling crude production in Venezuela, increasingly
a key supplier to India. Even though only 10% of India’s oil imports was from
Iran in FY18, a cut in oil exports by Opec’s third-largest oil producer could
manifest in India’s twin deficits — current account and fiscal. Sweet-grade
Brent crude has around 28% representation in the Indian import basket. “As far
as quantity of import from Iran is considered, there are alternatives. Also,
comparable grade of oil is also available. However, there were discounts given
by Iran (which others may not offer),” said MK Surana, chairman and managing
director, Hindustan Petroleum Corporation (HPCL). The Total Investment & Insurance Solutions
Tehran provides Indian importers a credit of
90 days compared with around 30 days by other suppliers. Iran is the
third-largest supplier for the country after Iraq and Saudi Arabia. Analysts
feel that India could even keep the current level of purchases from Iran despite
the US move. “While nations such as China, India and Turkey may oppose the US
move and keep current levels of Iranian crude purchases, American allies
including Japan and South Korea may comply because of concerns they could lose
a security umbrella against North Korea,” Bloomberg quoted MUFG Bank as saying.
According to Dilip Khanna, partner with EY, though there could be a negative
impact on India, the fine print of the sanctions have to be seen. The Total Investment & Insurance
Solutions
“Since Europe is not part of the sanctions as
was the case last time, it will not reset the clock to that extent,” added
Khanna. Unlike the last sanction era when more than 1 million barrels per day
became out of reach for the global market due to sanctions on Iran, at present,
300,000-500,000 barrels per day will be the impact given the country has not
been able to ramp up its production since the sanctions. HPCL’s Surana added
that India during the past sanction era India found out a way to trade with
Iran (paying in rupees) and people have lessons from the past, adding that it
is too early to take a call. Currently, India pays Iran in euros through
European banking channels and if European nations are not part of the
sanctions, it can continue to pay through the same channel. There is still time
before sanctions are actually imposed. According to a Nomura report, “The
Treasury Department noted that ‘Departments and Agencies will begin the process
of implementing 90-day and 180-day wind-down periods for activities involving
Iran that were consistent with the US sanctions relief specified in the
JCPOA’.” The renewal date of sanctions is May 12, 2018.
Experts believe that the US move would bring
uncertainty to prices. “The US calling off the nuclear deal with Iran and
proposing sanctions on it is unsettling from a geopolitical viewpoint and will
subject oil prices to huge volatility. This is, obviously, of grave concern to
India, that imports more than 83% of its oil consumption,” said Debasish
Mishra, partner at Deloitte Touche Tohmatsu India. Brent crude oil jumped 3% on
Wednesday and touched its peak since November 2014 at $77.20 per barrel. The
Indian basket of crude on May 8, 2018, was at $73 per barrel. The Total Investment & Insurance
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Surana believes that the increase in price of Brent is speculative in nature rather than reflecting physical activities at the production sites. “Fundamentals suggest that (up to) $70 per barrel is normal crude oil price,” he added.
Trump has decided to withdraw JCPOA, also called the Iran Nuclear Agreement, which was agreed upon in 2015 with the UK, France, Germany, Russia, China wherein the Persian Gulf country was to curb its nuclear programmes in return of lifting financial sanctions.The Total Investment & Insurance Solutions
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