INTERVIEW: Prolonged Middle East conflict can hit oil supplies to India, near-term impact minimal: FIPI chief

India's near-term oil supplies from the Middle East are unlikely to be affected despite the escalation of the conflict between Israel and Iran, but a prolonged period of tensions can disrupt supplies, trigger shipment delays and create potential domestic shortages, the head of the Federation of Indian Petroleum Industry told S&P Global Commodity Insights.

However, India's strategic crude diversification over recent years -- which witnessed rising inflows of both Russian and US crude oil and a reduction in imports from the Middle East -- will provide the required cushion over the long term, FIPI's Director General Gurmeet Singh added.

"Despite the recent Middle East crisis, escalating fears over supply diversions and higher shipping costs, it is unlikely to disrupt delivery of energy supplies to India because India's crude oil imports sourced from Saudi Arabia and Kuwait have their supply routes unaffected and utilize unobstructed passages through the Persian Gulf," Singh said.

"The Indian economy is unlikely to significantly feel the effects of the Middle East conflict in the short term. But a prolonged conflict can lead to disruptions in oil supply chains, affecting the availability of petroleum products. This can result in increased waiting time for shipments and possible shortages in domestic markets," he added.

Further, it could also raise inflation, thereby impacting India's trade balance owing to the rising cost of crude oil imports, foreign exchange reserves, and the overall health of the economy, Singh said.

"With tensions in the Middle East intensified, it could significantly affect global crude oil prices, as Iran is a major oil producer. Oil prices are currently in the range of $77/b-$78/b. However, the prolonged effect of the current global challenges can pose a serious threat to global oil prices. The increase in crude prices could also weigh heavily on investor sentiment in emerging markets like India, which relies on imports for 88% of its oil needs," Singh added.

Crude oil futures climbed nearly 4% on Oct. 7 as market participants braced for an Israeli retaliatory strike against Iran. NYMEX November WTI settled $2.76 higher at $77.14/b and ICE December Brent climbed $2.88 to $80.93/b.

Reflecting the risk of a direct conflict between Israel and Iran, Commodity Insights expects Platts Dated Brent to average $81/b in 2024 before easing to around $75/b in 2025.

Crude import diversification

According to data from S&P Global Commodities at Sea, India's crude oil imports from Russia stood at 1.7 million b/d over January-September, accounting for more than 40% of the total imports of 4.36 million b/d. Iraq was the second-largest supplier, with 940,000 b/d, while Saudi Arabia supplied 623,000 b/d over the same period, making it the third-largest supplier.

Imports from the United States stood at 215,000 b/d over January-September, making it the fifth largest supplier after the UAE, which supplied 423,000 b/d.

"India's demand for Russian crude remains resilient. In addition, the build-up in US crude inventories is also a signal that the market is well supplied and can withstand supply disruptions," Singh added.

Iran has one of the largest refining sectors in the Middle East, with about 2.4 million b/d of installed capacity in 2023. Its three biggest refineries are the 370,000 b/d Isfahan plant, the 360,000 b/d Abadan refinery, and the 320,000 b/d Bandar Abbas site.

In addition to the 320,000 b/d crude oil refinery at Bandar Abbas, the Persian Gulf Star project located at Bandar Abbas has about 399,000 b/d of condensate splitter capacity. Completed in 2018, the Persian Gulf Star plant is Iran's newest and most important domestic source of gasoline, accounting for about 40% of the country's needs in 2023, according to Commodity Insights.

The conflict between Israel and Iran so far has had a limited impact on oil prices as refineries and other infrastructure have not come in the line of fire, but the market is not discounting that possibility as Israel weighs its options on retaliatory strikes, which could potentially alter the scenario.

As OPEC's third-largest producer after Saudi Arabia and Iraq, Iran's crude output averaged 3.18 million b/d in August, according to the latest Platts OPEC+ survey by Commodity Insights.

"OPEC has enough spare oil capacity to compensate for any loss of Iranian supply. The Indian government has been monitoring the developments and is confident of navigating through the turbulence," Singh said.

SPR capacity expansion

Singh said India has been working to build its strategic petroleum reserves, but the current capacity won't be sufficient to provide a buffer against extended oil supply disruptions.

"The rising geopolitical tension across the globe is triggering a push for further investments in strategic oil storage," Singh said.

India's SPRs currently provide for about 9.5 days of total net oil imports. In addition, state-run oil companies hold storage facilities for crude oil and petroleum products for 64.5 days of total net imports. Hence, the current total national capacity for storage of crude oil and petroleum products stands at 74 days of total net imports, Singh said.

On the other hand, IEA member countries are required to ensure oil stock levels equivalent to no less than 90 days of their net imports.

"Despite the recent global challenges affecting supply disruptions, prioritizing energy security, affordability and sustainability are the key issues. Collaborating with partner countries -- in replicating successful strategies across both conventional and non-conventional energy sources -- is essential for a sustainable energy model," Singh added.