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Highlights

India imports 845,000 b/d of Saudi crude over January-August

New Delhi exploring options to boost Russian crude inflows

More state refiners may eye term contracts for US crude

Singapore — The drone attacks on Saudi Arabia's critical oil infrastructure may provide India with enough reasons to not only further diversify its crude supply sources and slash its massive dependence on Middle Eastern shipments, but may also prompt New Delhi to speed up the expansion of its strategic oil reserves capacity.

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While India is not expecting any immediate disruption to supply from Saudi Arabia, it has intensified diplomatic efforts to bring in more oil from Russia as well as from the US to cushion any potential disruption in supply from the Middle East -- which currently accounts for roughly 65% of India's crude import basket -- in the event tensions escalate.

"The unrest in the Middle East poses further risk for India in terms of regular crude oil supplies," said Sumit Pokharna, oil and gas analyst at Kotak Securities.

"Considering the strategic importance of flawless crude supplies to refiners, India may look to two options -- first, optimum utilization of strategic petroleum reserves to withstand supply shocks, and secondly, diversifying oil supplies," he added.

Related factbox: Attacks on Saudi oil units affecting major Asian crude buyers differently

India received about 845,000 b/d of crude oil from Saudi Arabia over January-August, accounting for 18.5% of its overall imports of 4.58 million b/d in the period, according to shipping data. Saudi Arabia was the second-largest supplier to India in the eight-month period, behind Iraq.

"India is vulnerable to a prolonged period of lower crude supplies from Saudi Arabia even though the country has some SPRs and commercial crude stocks as cushions for the short term," said Lim Jit Yang, adviser for oil markets at S&P Global Oil Analytics.

After the attacks on Saudi Armaco facilities, Indian petroleum minister Dharmendra Pradhan said the government had contacted top management at Aramco to ensure steady supplies to India. Some oil ministry officials said Indian refiners would receive the usual volumes in October.

"We have reviewed our overall crude oil supplies for the month of September with our oil marketing companies. We are confident there would be no supply disruption to India," Pradhan said.

Views from a source at state-run Indian Oil Corp. echoed comments made by the minister.

"We don't think there will be any disruption of supplies or reduction in volumes from Saudi Arabia, but we could see some minor tweaks in grades," the IOC source said.

Senthil Kumaran, consultant at Facts Global Energy, noted: "Aramco may send heavier grades instead of Arab light for October to India."

INTENSIFYING DIPLOMATIC EFFORTS

Earlier this week, a delegation from Rosneft discussed energy cooperation with India, paying particular attention to increasing supplies of Russian crude to Indian refineries.

"The two sides agreed to intensify cooperation on strengthening India's energy security and guaranteeing supply of high quality feedstock and oil products to Indian consumers," Rosneft said.

In addition to Russian supplies, analysts said the attacks would likely prompt India to aim to boost inflows from the US.

The US exported around 267,000 b/d of crude to India over the first seven months of this year, more than doubling from 129,000 b/d over the same period last year, according to the US Census Bureau.

"India has some options as far as volumes are concerned -- Russian, US crude. The grades may not be one-on-one replacements for Middle Eastern crudes, but a lot of India refiners can process a variety of crudes," Lim of Platts Analytics said.

FGE's Kumaran said that some 400,000 b/d of US crude would arrive in India in October.

"Indian national oil companies have firmed up term volumes from the US to partly replace the lost Iranian barrels. MRPL is taking medium sour grades from the US for October delivery on a spot basis," he said.

India's growing reliance on US crude amid Middle East supply risks

DEPENDENCE ON IMPORTED OIL

Some analysts said more diversification needs to be done.

"Although the country has diversified its crude basket, still it's not enough," Pokharna said, adding that India's dependence on imported crude was nearly 84% in the fiscal year ending March 2019, making it sensitive to crude oil price movements.

"A meaningful jump in crude oil prices is bound to impact the oil import bill and trade deficit; higher crude oil price means higher current account deficit," Pokharna said.

Kumaran said the attack on Saudi facilities may prompt India to consider how to have relatively more comfortable reserves in the future, noting: "The current available storage can cover only for a few days."

Vima Jayabalan, research director at Wood Mackenzie, added: "India could be most exposed as its reserves are the least."

In the first phase, India set up SPRs in three southern locations with a combined capacity of 5.33 million mt. For the second phase, New Delhi is looking to add another 6.5 million mt over the next few years.

-- Sambit Mohanty, sambit.mohanty@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com