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Last Updated : Apr 21, 2020 12:39 PM IST | Source: Moneycontrol.com

Oil price crash can be a blessing in disguise for India

The current slump in global crude price is an opportunity for India’s ambitious Indian Strategic Petroleum Reserves programme. India may leverage the depressed prices to fill in its strategic crude oil reserves

Moneycontrol Contributor @moneycontrolcom
Representative Image (Reuters)
Representative Image (Reuters)

Veenu Singh

Set against the current reality of cratered oil demand and over-supply, Indian strategic petroleum reserves venture and unused storage capacity will help build up inventories for consumption-led growth in post-COVID-19 times.

The recent collapse of the global oil market, the steepest in recent history, has engulfed the oil and gas industry in a double whammy. The major oil-producing nations are locked in battle for market share that has led to a price war in the midst of the novel coronavirus outbreak. The consequent fall in global oil demand is predicted to be bigger than any since oil became a global commodity. This, at a time when the global economy will likely face the worst recession since World War II.

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Oil markets went into tailspin in early March as OPEC and Russia disagreed on production cuts. The result has been that more oil has flooded into an already over-supplied market, resulting from a drop in demand. The negative demand shock almost emerged overnight in the early first-half of Q1 2020, driven by the freezing of the Chinese economy. This was the sharpest decline in quarterly demand since the global financial crisis.

The second quarter of 2020 is likely to witness a further unprecedented decline in global oil demand growth, aided by mass lockdown and halt of transportation and economic activity. As COVID-19 continues to weigh in on global oil demand, price of WTI crude for May futures fell to an unprecedented low of minus $37.63 a barrel suggesting that sellers were paying buyers to take oil deliveries in a bid to avoid storage cost. Most short-term analysis for world oil demand predict that it will pick up gradually and return to pre-COVID growth levels only by early next year.

The severe decline in oil demand has led to an enormous supply surplus, for the first half of 2020, which is pegged at 1.8 billion barrels — the highest ever in history. The key question for the market is regarding the storage of this production surplus. To add insult to injury, unused global crude oil storage capacity is estimated to be 1.6 billion barrels, which is less than the production surplus. Therefore, it is likely that production will decrease in the coming quarters or perhaps be forced shut.

It is safe to infer that as long as oil demand is falling, availability of storage will be premium. It will be storage infrastructure rather than break-even prices that will determine geographies where production could be shut. A shut-in in oil production is already happening in the North Sea along with contraction in East Asia and no new investments in the United States.

Storage is pivotal but often ignored segment of oil market analysis. The current slump in global crude price is an opportunity for India’s ambitious Indian Strategic Petroleum Reserves (ISPR) programme. India, a net importer and third-largest buyer of crude oil, may leverage the depressed prices to fill in its strategic crude oil reserves.

India has an existing storage capacity of 5.3 million tonnes at Visakhapatnam, Mangaluru and Padur, which is operational and can support 9.5 days of net imports of crude oil. In addition, the government has approved the construction of 6.5 million tonnes of strategic crude oil reserves at Chandikhol and Padur, equivalent to 12 days of net crude imports. This project under ISPR Phase II has, however, undergone long delays.

The International Energy Agency (IEA) members are required to maintain emergency oil reserves equivalent to at least 90 days of net imports. The ISPR facilities, once operational, along with inventories with Indian refiners will support oil reserves equivalent to 87 days of net imports. Considering that Indian basket stood at $19.79/barrel on April 1, down 70 percent from its high at the beginning of January, this may be the opportune time to buy from the spot market and fill up the strategic rock caverns.

This is also an apt time to explore further investments in storage capabilities including the tanker industry. Lower crude prices are a boon to Indian State-owned refiners, such as the HPCL and the BPCL, as lower procurement costs boost their refining margins. Also, cost that refineries incur due to the fuel consumed to run their operations and the cost of fuel lost in the system while processing crude oil into petroleum products is set to go down.

Considering India’s import dependency for crude oil has consistently risen over the past five years to 86 percent in 2019-20, cheap crude in times of pandemic may prove to be a blessing in disguise. India needs to leverage this by filling up unused oil storages and building up inventory. High growth in India’s crude oil consumption has enhanced its influence on the global energy trade. This is further set to enable the government to engage in oil diplomacy, get favourable deals for supplies of crude oil and for acquisitions.

Veenu Singh is Young Professional, NITI Aayog. Views are personal.
First Published on Apr 21, 2020 12:39 pm
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