US-Iran tensions may spell trouble for India's oil future and economy

Vehicle burning at the Baghdad International Airport following a US airstrike. Photo: PTI
Brent crude, the international benchmark for oil prices, rose 4.4 per cent to reach $69.16 a barrel at one point on Friday after the United States killed a top Iranian commander in an air strike, raising concerns about its impact on the Indian economy.

The attack comes at a time when the Indian crude oil basket has averaged at $64 a barrel so far this financial year (2019-20, or FY20). The country’s crude oil import bill is expected to increase from the earlier target of Rs 7.84 trillion which was marginally high — by 0.15 per cent — compared to 2018-19.

On Friday, the Indian basket crude oil price was seen at $65.99 a barrel, which may further increase in the case of escalation in tensions in the West Asian region.

According to the latest government estimates, if crude oil prices change by $1 a barrel, India’s import bill will increase by Rs 6,328 crore. In addition, every Re 1 a dollar increase in the exchange rate adds around Rs 5,883 crore to the crude oil import bill.

“For the next two weeks, the markets will be tense. Prices are likely to shoot up if the crisis sustains and $75 a barrel price level cannot be ruled out,” said K Ravichandran, senior vice-president and group head - corporate ratings, ICRA.

He added the rising prices might affect trade deficit and under-recoveries of oil marketing companies (OMCs). Experts indicate that petrol and diesel prices may also rise, which will have an inflationary impact.

Owing to lower economic activity, India’s crude oil demand was on a declining curve for the first time in several years as imports dropped by 0.7 per cent during the April to November period of last year to 149.9 million tonnes (mt), compared to 151 mt during the same time in FY19.

Crude oil import bill saw a massive decline of 11.6 per cent to $69.5 billion in the April to November period of last year, compared to $78.6 billion during the same time in FY19 because of low price.

“Since we are now importing close to 85 per cent of our oil requirement, any instability in the Persian Gulf is not good news for India — both from the price volatility and the supply security angle. Also global crude demand is looking up for 2020 after a muted year,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu.

A senior Oil and Natural Gas Corporation (ONGC) official said none of the officials of ONGC Videsh is stuck in the crisis-hit countries.

According to another industry expert, this will have an impact on global crude oil demand that was expected to increase by the middle of this year. Till November last year, India’s overall import bill was seen at $318.8 billion, of which petroleum imports was around 25.4 per cent.

According to the latest figures, India imported 64.9 mt of crude oil from West Asia till September in FY20. However, the total import from the region is expected to be lower than 143 mt and 142 mt imported in the past two years.

Any West Asian crisis will also impact remittances since a major portion of this comes from this region. The Indian diaspora sent $79 billion back home in 2018.

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