The Trump administration in the US on Monday imposed sanctions on Petroleos de Venezuela, in a bid to force President Nicolas Maduro to cede power to the opposition leader Juan Guaido, who declared himself interim president last week. This move, which essentially translates to an oil ban, is expected to complicate the global oil supply mix and perhaps even push up oil prices.
Given that India is the world's third largest oil importer - we import over 80% of our oil requirements - such a hike will inflate the import bill and disrupt the country's fiscal position, which is already raising red flags on account of the pre-election sops being announced.
Venezuela was India's fourth biggest crude supplier after Iraq, Saudi Arabia and Iran in the current fiscal till November, accounting for about 12% of India's total oil imports. So sanctions against the South American nation, coming on the heels of the US sanctions on Iran oil, means that oil flows from the two OPEC nations are now restricted.
Compounding matters, in December, OPEC and its 10 allies, including Russia - or OPEC+ - agreed to reduce oil output during the first six months of 2019. But, according to Bloomberg, even before the production cuts kicked-off this month, OPEC's oil output saw the steepest fall since January 2017, aided in part by the worsening situation in Libya and curtailed supply from Nigeria.
"Rise in crude oil prices will commensurate in an increase in petrol and diesel in the depending on how the oil markets react in the reduction in supply," CARE Ratings said in a recent report, adding, "We assume at the macro level with imports of 1643 million barrels of crude oil in FY19, a dollar increase in prices on a permanent basis would increase the bill by roughly $1.6 billion per annum."
Fuel prices in India change every fortnight tracking changes in crude oil prices in the international market. "The oil markets have had a muted reaction so far to the chaos in Venezuela given the global oil markets are well supplied due to the increase in the US production [to record levels]," read the CARE Ratings report, adding that the output is estimated to rise further as the number of rigs looking for new oil has increased for the first time in 2019.
This, along with the grant of temporary waivers by the US on Iranian sanctions, caused the global oil markets to be well supplied, prompting international crude oil prices to fall sharply in December. Concerns on the oil demand front courtesy slowing global economy - pulled down by the US-China trade dispute -also weighed on oil prices.
"We believe the price of Brent crude oil will not exceed $65 bbl [per barrel] in the short term given the rise in US fuel stocks and global economic woes, which has weighed the demand outlook for oil. Going forward if the crises in Venezuela is not resolved by the time the waiver period of the Iranian sanctions is lifted, it could prove as double whammy on the oil prices raising it to $70 bbl levels by May 2019," the report added. If that happens, there will be spillover effects on the rupee as well as inflation, in addition to India's trade deficit.
There just might be silver lining, too. Some traders and experts point out that the new sanctions will likely force Venezuela to send more crude to China, India or other Asian countries. India is the third-biggest buyer of Venezuelan oil, after the US and China, and Reliance Industries Ltd and Nayara Energy (formerly Essar Oil) - are the primary buyers.
"Both Reliance and Nayara have a big appetite for Venezuelan crudes given their heavy crude slate," Senthil Kumar, an analyst at energy consultant FGE, told Bloomberg. "They cut imports recently due to declining production in Venezuela and Mexico. This is good opportunity to take some volumes that are redirected from US, but upside is limited."
However, India's state-owned refiners like IndianOil and BPCL are reportedly unlikely to benefit from more Venezuelan crude as their refining systems can't handle its quality. That puts a stop to hopes that increasing Venezuelan oil supply will curtail oil prices from moving up further. Petrol and diesel prices in the country have already increased by more than Rs 2 per litre each in January. Much now depends on the April 2019 OPEC+ meeting to review the oil market situation.
With agency inputs
(Edited by Sushmita)