BT EXPLAINER: Why Indian basket crude oil at $143 a barrel is more expensive than Brent and WTI

As the US-Israel war with Iran enters the third week, the movement of crude oil and natural gas across the Strait of Hormuz—the narrow waterway that connects the Persian Gulf with the Gulf of Oman—has been severely impacted. Close to 20% of the world’s crude oil, natural gas, and liquefied petroleum gas is shipped through the narrow Strait of Hormuz. Almost half of India’s crude oil needs and 20% of its gas use the same route.

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As the flow of the most traded commodity globally gets hit, global crude oil prices are on the rise. Iran had earlier threatened that crude prices could hit $200 per barrel. On 16 March, India’s crude oil basket touched $142.69 per barrel. That’s more than double the $70 per barrel for the Indian basket that was prevailing when the war started on February 28. This is the first time that the India basket has hit such a high level.

In June 2022, it had hit $121 per barrel as the Russia-Ukraine war continued and a strong post-COVID demand surge. In sharp contrast, Brent crude oil today is at $104, and WTI (West Texas Intermediate) is at $98 per barrel. The Indian basket crude is now 37% more expensive than Brent and 45% more expensive than WTI.

Why is there such a huge difference in the Indian basket and Brent crude prices? That is because India is paying the price now for some panic deals that were done earlier when the US launched a military strike in Venezuela (January 3) and captured then-president Nicolas Maduro. Some other deals were done soon after the US attacked Iran at the end of February. 

The India basket comprises sour grade (Oman & Dubai average) and sweet grade (Brent dated) crude oil processed in Indian refineries. The sour grade accounts for 78.71% and the sweet for 21.29% of the basket. The Iran conflict has resulted in a hike in prices of Middle Eastern grades of crude, which formed the bulk of the India basket. The India basket represents actual prices we are paying now, while Brent and WTI rates are futures for delivery over a longer term.

The high-sulphur sour crude that India imports means higher processing costs at complex refineries. Says Deepak Mahurkar, Partner at PricewaterhouseCoopers: “The higher rate for the India basket is also due to the fact that insurance and shipping rates for cargoes from the Middle East have risen in recent times.”

Is India's oil secure?

India has 30 days of crude oil reserves—15 days in strategic reserves underground and another 15 days in the various refineries. Addressing Parliament, the Union Minister for Petroleum and Natural Gas, Hardeep Singh Puri, stated: “India’s crude supply position is secure, and volumes secured exceed what Hormuz would have delivered. Before this crisis, approximately 45% of India’s crude imports transited the Hormuz route. Non-Hormuz sourcing has risen to approximately 70% of crude imports, up from 55% before the conflict began. Now India sources crude oil from 40 countries, against 27 in 2006-07.” That means there is no immediate crisis as far as crude oil imports and product availability is concerned.

The other oil options for India

Though India has managed to get two tankers to transit through the Strait of Hormuz in recent days, there are at least another 22 others awaiting clearance. Since clearance for tankers is being done on a case-by-case basis, India needs to acquire cheaper crude where available. That’s where the option of buying Russian Urals crude on the high seas emerges, now that the United States has provided a one-month waiver on purchasing Russian oil without any sanctions.

But here too, there is a problem. The landed price of Urals at India’s west coast at $98.93 per barrel now means the discount to Brent dated is just $4.8 per barrel, the lowest since India started buying Russian crude oil in 2022. Any discount is welcome in today’s crude oil market.

The saving grace for Indian consumers is that despite the surge in the Indian crude oil basket, there has been no hike in fuel prices yet since the war started. Already, at least 95 countries have hiked the prices of fuel—petrol and diesel—with Cambodia logging the sharpest increase at 68%. The India basket price will come down in sometime as the country strikes cheaper deals with global suppliers over the next few weeks.