India, one of the fastest growing oil demand centers in Asia, has added the US to its long list of crude suppliers. Early this month, Indian Oil Corp sealed its first deal to import US crude. This was followed shortly by BPCL's purchase of Mars and Poseidon grades. Sambit Mohanty, S&P Global Platts senior editor for oil news and analysis, explains why India's diversification is crucial and what it could mean to Middle Eastern suppliers.
Is India's appetite for US crude oil sustainable?
By Sambit Mohanty, Senior Editor, Oil News and Analysis
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India has added the US to its long list of crude suppliers. This has left the market wondering if it marks the start of a trend.
In early July, Indian Oil Corp sealed its first deal to import US crude. The deal to buy 1.6 million barrels of Mars grade was not only IOC's first purchase from the US, but it was also the first ever purchase by any state-run refiner in the country.
Bharat Petroleum Corp – another state refiner – followed suit, picking up 1 million barrels from the US.
The deals came shortly after Prime Minister Narendra Modi's visit to the US, where both countries discussed ways to boost energy cooperation.
Indian refiners are pushing hard to diversify crude purchases and it shows. To do that, refiners are even willing to take drastic changes to their shipping strategy.
IOC buys most of its crude on an FOB basis. But for the US deal, it took special permission from the government to buy on a Delivered Ex-Ship basis. IOC says that as far as the cost economics of the US cargo is concerned, it is comparable to Basrah Light.
Indian refiners have been spoilt for choice over the past few months. Unusual arbitrage opportunities have emerged because of output cuts by OPEC and non-OPEC producers.
Not only the window to ship in US crude has opened up, even India's imports of Russian Urals have also risen, challenging some of the Middle Eastern sour barrels.
India is clearly mounting pressure on some suppliers for preferential treatment on pricing. And New Delhi feels it has reasons to do so.
The South Asian nation is turning out to be one of the fastest oil demand growth centers in Asia. According to Platts Analytics, India's oil demand growth rate is expected to outpace China's rate for the third year in a row.
To meet that incremental demand, it feels that widening its crude buying basket is crucial. State refineries are even upgrading to increase their ability to process various crudes, and quickly switch between different grades.
While initial US deals are expected to be finalized through tenders, the market feels that even term deals for US crude are also possible in the near future. Private refiners Reliance and Essar are also expected to jump into the bandwagon and look for US cargoes.
As India joins other Asian refiners who have been sourcing US crude because of favorable economics, it will clearly add to the headache of some Middle Eastern suppliers. As long as OPEC cuts are in place and Dubai prices remain elevated, it won't be surprising to see a steady inflow of US crude cargoes into India.
Until next time on The Snapshot, we’ll keep an eye on the markets.