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Iraq's dominance over Indian crude market to be tested if Iran returns

Highlights

Iraq takes 25% market share of India's crude market in 2020

Saudi Arabia retains second spot but volumes drop almost 11%

UAE, US each grow their crude volumes to India by nearly 30%

Singapore — Iraq's crude exports to India grew nearly double-digits last year, helping it retain the title of India's top oil supplier in 2020, but it may struggle to attain similar growth in 2021 if the newly appointed US President Joe Biden resurrects the nuclear deal with Tehran, which could potentially see the return of Iranian crude, analysts told S&P Global Platts.

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With 2020 being the first year when Iranian crude inflows into India dropped to zero, that gave Iraq an opportunity to grab a market share of as high as 25%, with shipments of about 50.17 million mt in 2020, up from 45.88 million mt in 2019, shipping data showed.

"Competitive pricing was an important factor to make Iraq the top supplier of crude to India. But Iraq's share in 2021 could go lower as there is a likelihood of some crude coming back from Iran due to the potential easing of US sanctions from the new Biden administration," said Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics.

Iranian oil exports have been severely hit since former President Donald Trump pulled the US out of the nuclear pact in May 2018. Biden's team has indicated it would seek to reinstate the agreement -- known as the Joint Comprehensive Plan of Action -- as soon as practical, though this will depend on how open Iranian officials are to a renegotiated deal.

S&P Global Platts Analytics forecasts that Iranian crude supply could grow by 500,000 b/d between June and December, assuming a new agreement is forged by late 2021 and that the Biden administration is not as stringent about policing sanctions enforcement than the Trump administration. In a best-case scenario, growth of up to 1 million b/d is possible by December, Platts Analytics estimates.

The potential return of Iran

According to shipping data, Iran supplied 795,000 b/d of crude to India in 2017, 470,000 b/d in 2018, while it dropped to 90,000 b/d in 2019.

"Indian refiners are very used to Iranian crude. They will be happy to go back to buy crude from Iran if the gates open up," said one official at a refiner. "That will make the competition stronger for suppliers like Iraq."

While private refiners like Nayara have remained active buyers of Basrah Light and Basrah Heavy in the spot market in 2020, state refiners have also shipping in cargoes from the Middle Eastern supplier, though their volumes contracted as oil demand recovers.

Saudi Arabia was the second-largest supplier in 2020, but its volumes declined almost 11% from 2019 to 35.91 million mt last year, customs data showed.

Traders and analysts expect volumes from Saudi Arabia to remain tight in 2021. Saudi Arabia in early January made surprise announcement of an extra 1 million b/d production cut. It plans to hold its February and March crude production to 8.119 million b/d, well below its quota of 9.119 million b/d, to help bring down oil inventories that had bloated because of the pandemic.

"Saudi Arabia's share of the Indian market could see a decline with its pledge to cut production, with other exporters standing to gain," Lim added.

Both state and private refiners in India have a natural inclination towards medium and heavy sour crudes from the Middle East because of the ability of the country's complex refineries to process those grades.

Freight plays a significant role in Indian refiners' crude purchasing. They prefer flexible short-haul crudes -- for example around say 4-5 days shipment period from the Middle East, compared to about 30 days for Columbia and 40-45 days for Venezuela.

UAE, US see robust volume growth

"Iraq retained the top spot while we see growth in exports from UAE. Some of the big suppliers offer a more extended credit period. Suppliers such as ADNOC intend to invest and store crude in Indian strategic petroleum reserves, which is helping volumes to grow," said Senthil Kumaran, head of South Asia oil at Facts Global Energy.

UAE was the third-largest supplier of crude to India in 2020, with volumes growing close to 30% on the year to 21.35 million mt in 2020, customs data showed.

To attract foreign investments for Phase 2 expansion of the SPR facilities, the Indian government has recently allowed re-export of crude from the caverns. India has been also actively securing small stakes in overseas upstream assets.

Other than the Middle East, US crude imports by India in 2020 were at 12.69 million mt, up nearly 29% from a year earlier, helping the country move up to fifth position from sixth in 2019, customs data showed.

According to the latest data from the US Census Bureau, US exported 430,00 b/d of crude to India in November, rendering it the top destination of US crude for the month.

Analysts expect India's overall crude imports to rise in 2021 as refiners boost runs to meet a rebound in oil demand after a sharp contraction in 2020.

FGE expects India's crude imports to average around 4.4 million b/d in 2021, up about 9% from 2020 levels.