Why should a weekend meeting of oil exporting countries (OPEC Plus) worry India? That is because 85 per cent of the country’s crude oil demand is met through imports. So decisions taken by these countries have an impact on crude oil prices, and if they spike, consuming nations will have to break their backs to manage their fiscal math.

OPEC Plus members who are well aware of this fact use it to their advantage.

Any decision that leads to demand outspacing supply is not a good news for large consumers and New Delhi has been asking the OPEC Plus members to create a balance in the global oil market between adequate supply and responsible and reasonable pricing. Simultaneously, India has been working towards a stable energy transition, but this may not be enough.

The obvious question is how much do the OPEC Plus decisions impact the oil price now? And should India worry?

“The current oil price stands slightly below the average over the last 15 years (in nominal terms), and considerably lower than one year ago. In real terms, current prices are even lower while over the same time frame we have seen solid economic growth on a global level.

“OPEC and OPEC+ aiming to control market balances, i.e. adjusting supply to keep it in line with demand, has resulted in periods of elevated oil price volatility.

“Last year, coal and natural gas prices have been considerably more volatile than crude oil considering that there are no players aiming to keep the market in balance. So from that point, with OPEC+ controlling about 50 per cent it remains relevant,” said Giovanni Staunovo, Commodity analyst at UBS Global Wealth Management.

According to Kang Wu, Head of Global Demand and Asia Analytics, S&P Global Commodity Insights, the members on June 4 decided to largely roll over their production quotas, but extend their voluntary cuts to the end of 2024, as agreed on April 2.

On top of that, Saudi Arabia will cut its oil production voluntarily by 1 million b/d at least through July. The immediate impact on India, and other Asian oil importers, is lower crude imports from Saudi Arabia for July when the kingdom honours its commitment.

As a net oil importer, higher oil prices is bad news for India. The impact of the OPEC+ decisions on oil prices is bullish in general but is also complicated.

This leads to the next question, which is, does this mean India is in a comfort zone?

To this, Vandana Hari Founder & CEO of Vanda Insights, said “The Saudi move to unilaterally cut 1 million b/d of production, only in July for the time being, hasn’t sent alarm bells ringing in consumer countries because it has not actually given a boost to crude prices. Could it have put a floor under crude? Maybe. I don’t think India needs to be worried just yet, but I wouldn’t say it is in a ‘comfort zone’ either.”

“The leadership should continue to convey its concerns over high oil prices to OPEC producers through the back channels, because there is a real danger that OPEC+ tightens supply into a recessionary environment, making things worse,” she said.

Long-term solutions

Clearly, New Delhi needs to find long-term solutions. “India should worry anyway because oil prices are going to rise even without the cut as demand outpaces production. However, increase in prices is one thing, shortages is another. India must build a massive strategic petroleum reserves that exceed 300 million barrels. The plan and the facilities must be ready to take advantage any crash in oil prices” said Anas Alhajji, Energy expert and Managing Partner, Energy Outlook Advisors, LLC.

According to Staunovo, for India, the creation of additional capacity to store strategic crude and refined product reserves would help smoothen larger price fluctuations.

Yes, India has created strategic reserves and is now further expanding them. But the current capacity is very minimal to meet the demand. A Special Purpose Vehicle (SPV) Indian Strategic Petroleum Reserve Limited (ISPRL) was created on June 16, 2004. ISPRL has been mandated to build and operate strategic crude oil reserves. On May 9, 2006, ISPRL became a fully owned subsidiary of Oil Industry Development Board.

Under Phase I, the government through ISPRL has built SPR facilities with a total capacity of 5.33 MMT at three locations — Visakhapatnam (1.03 MMT + 0.33 MMT HPCL), Mangaluru (1.5 MMT) and Padur (2.5MMT). All the three facilities were commissioned in June 2015, October 2016 and December 2018 respectively.

Besides, Indian players, Abu Dhabi National Oil Company (ADNOC) has filled one of the caverns of Mangaluru under an agreement with ISPRL in 2018.

The Union Cabinet on July 8, 2021, approved the development of Commercial-cum-Strategic Petroleum Reserves under Phase II. These were at Chandikhol, Odisha (4 MMT) and Padur II, Karnataka (2.5 MMT). It also gave its nod for dedicated SPMs and associated pipelines on Design, Built, Finance, Operate and Transfer basis under PPP mode as well as floating Request for Proposal for both the locations.

The Odisha government, after evaluating application for land allotment for the Chandikhol Project, has advised ISPRL to explore the feasibility of SPR’s at an alternative location. Alternative sites proposed by Engineers India Ltd (EIL) are being reviewed for preliminary feasibility by a joint team of ISPRL and EIL.

For the Padur project, ISPRL has submitted requirement of acquiring land to Karnataka Industrial Area Development Board. The Final Gazette notification has been done by KIADB for 214.79 acres and demand has been received for payment to KIADB on June 5. The project is expected to be completed in 72 months from the startof construction under PPP mode by Concessionaire.

However, this may not be enough. India also needs to start using back channels with like minded countries and push for making the oil market more stable. It can use the diplomatic route and make a case for accessing Venezuelan and Iranian crude, which would ensure more supply and price stability.

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