Singapore — A question mark on India's future strategy in buying crude oil from Iran as well as Beijing's trade war with Washington have opened a window of opportunity for Indian refiners to dramatically step up purchases from the US, a trend that could continue in the coming months.
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As plentiful volumes of US crude might be looking for new homes when China imposes a 25% import tariff on American crude, a large number of the displaced barrels could make its way to India, analysts said.
According to the latest US census exports data, from an average of 29,000 b/d of crude flow from the US to India in the January-April period, the volume jumped sharply to 152,000 b/d in May and 261,000 b/d in June, a new monthly record.
"We believe that any cutback in China's crude oil imports from the US due to US-China trade tensions will see more US crude cargoes heading towards Europe, India and Southeast Asia," Lim Jit Yang, director for Asia at S&P Global Platts Analytics, said.
China received 14.65 million barrels of US crude in June, a historical high, but volumes have more than halved to just 6.9 million barrels in July, according to Platts' vessel tracker cFlow.
Arrivals in August are expected to shrink even more to around 6 million barrels. Oil tankers laden with US crude that were initially headed to China appear to be getting diverted to other buyers.
"We are seeing that Indian refiners are now more open to consider mini term deals for US supplies -- for example one US cargo per month. This will help them import US crude on a regular basis," Senthil Kumaran, senior oil analyst at Facts Global Energy, said.
Private refinery sources in India added that an improvement in shipping logistics in the US had whetted the appetite of many Indian refiners to buy American crude on a regular basis.
"We will definitely see more US crude coming to India in H2. Shipping is now much more smoother and whenever economics works, we will see more volumes of US crude coming to India," a source at a private refiner said.
FGE added, however, that US would be only filling a part of the void created by a fall in imports from Iran.
"Although US crude is seen as a key alternative for India to fill in the gap left by Iran, the bulk of the lost heavy sour Iranian grades has to come from the Middle East and Latin America. This is considering the configuration of Indian refineries as they are generally complex and rely largely on heavy barrels," FGE said in a note.
THE IRAN PUZZLE
FGE said Indian private refiners, Reliance Industries and Nayara Energy, previously known as Essar, were already sharply reducing imports from Iran ahead of the November deadline.
"Although US Treasury has recently hinted that some waivers on Iranian sanctions will be considered, Trump administration's hardline stance and the pace with which it is moving concerns India, one of Iran's major crude buyers," FGE said. "Iranian imports will likely nosedive on high compliance."
Indian crude imports from Iran continued in the range of 200,000-250,000 b/d during the previous sanctions on Iran. Nayara Energy took about half of the total Iranian inflows, while the rest was absorbed by state-owned oil companies. RIL did not buy Iranian crude at the time.
After the sanctions were lifted in 2016, Indian state-owned refiners stepped up Iranian crude imports as Tehran offered steep discounts on freight.
In addition, Iran allows a 60-day credit on oil purchases, making it lucrative for Indian refiners.
"Although India's foreign ministry has indicated that it will follow UN sanctions and not unilateral US sanctions, issues with financing or insurance coverage will prevent some Indian refiners from buying Iranian crude," Yang from Platts Analytics said.
Some shipping sources tracking the crude trade between India and Iran said that most state-owned Indian refiners got the crude delivered by the National Iranian Oil Company through tankers owned by the National Iranian Tanker Company.
For August loading, while NIOC is heard to be delivering crude oil cargoes to some Indian state-owned refiners on a DES, or delivered ex-ship, basis, others have been buying on both DES and FOB bases.
With three months left for the winding-down period to end, there has been some debate among Indian industry sources on whether New Delhi would seek a waiver from Washington to continue importing Iran crude.
Brian O'Toole, a US Treasury Department senior adviser from 2009-2017, said that Indian refiners would face "extreme" difficulty buying Iranian oil even if they wanted to use euros.
"You can't get out of rupees and into the euro without going through dollars," said O'Toole, currently a senior vice president at BB&T Bank which specializes in anti-money laundering and sanctions. "So how are you going to buy this stuff without going through the dollar market?"
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