State refiners Indian Oil Corp and Hindustan Petroleum Corp are holding talks with Iraq's national oil company to buy 4 million barrels of Basra light crude oil for India's strategic petroleum reserves (SPRs), three sources said.
India in March asked the state refiners to each seek two very large crude carriers (VLCCs) of Iraq's Basra crude oil for arrival in May-June totalling 8 million barrels for the reserves in the coastal city of Vizag in southern Andhra Pradesh state.
But after being faced with having to pay a premium for spot oil purchases the refiners had decided to directly negotiate with Iraq's State Oil Marketing Organisation (SOMO), said the sources with knowledge of the talks.
So far the indications were that SOMO would supply the refiners with Basra Light crude at the official selling price, said one of the sources, who declined to be identified due to the sensitivity of the issue.
The sources said the refiners were looking for the oil supplies to arrive in the next two to three months.
Hindustan Petroleum Corp (HPCL) declined to comment.
Indian Oil Corp (IOC) and SOMO did not immediately respond to emails seeking comment.
HPCL last month awarded a tender for June loading to European trader BP at USD 1.40 a barrel above the official selling price (OSP).
IOC, the country's biggest refiner, agreed to pay a premium of 50-60 cents a barrel to Chinese trader Unipec for a VLCC arriving in mid-June.
"The spot market is getting pricey now," said an Asian oil trader, highlighting recent spikes in Basra light premiums. "I think SOMO's ambition to push the OSP for Basra Light higher is achievable now."
Spot premiums for Basra light crude hit a multi-year high after Iraq cut supply of the grade to export more of its new heavy grade in June.
In May, Iraq set the price for Basra Light cargoes loading this month at minus USD 2.55 a barrel against the average of Oman/Dubai quotes, up 25 cents from the previous month. SOMO is expected to raise the price for July-loading cargoes next week.
India's finance ministry has set aside 24 billion rupees (about USD 375 million) from revised budget estimates for the current fiscal year to pay for filling its first SPR allocation.
The Vizag facility has two compartments of 7.55 million barrels and 2.20 million barrels. The smaller compartment will be used by HPCL for its 166,000 barrel-per-day Vizag refinery.
HPCL is using Nigerian Qua Iboe oil supplied by Unipec for the smaller compartment.
A total of three SPRs in the south of India will hold more than 36 million barrels of oil, enough to meet about 13 days demand in India in case of a supply disruption or extreme price volatility.
The two other SPRs, at Padur and Mangalore in southern Karnataka state, will have a capacity of 29.3 million barrels and are expected to be ready by October.
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