India's crude diversification to the rescue if Middle East tensions escalate: Puri

India's crude import diversification will come to the rescue if tensions in the Middle East escalate and create supply hurdles, but triple-digit oil prices would move consumers further away from fossil fuels and accelerate the energy transition process, Petroleum Minister Hardeep Singh Puri said.

He said India was keeping a close eye on the ongoing conflict in the Middle East, and there was no immediate threat to supplies.

"The place where all the events are taking place is in many respects the center of the global energy industry. So, we will watch very carefully. And as we go along, we will navigate our way through this," he told reporters.

Violence between Israel and Hamas militants continues to dominate sentiment in the crude oil market, with the conflict clouding the supply outlook from the Middle East. But as the conflict was into its sixth day without drawing in other regional powers, namely Iran, the market appears to be discounting fears of a significant energy impact.

"Today, the world that you are facing is not a world which is characterized by shortage of crude. I mean the amount of crude oil that is required to sustain the current level of consumption, which is about 100 million-102 million b/d is available. But some 5 million b/d has been taken off the market. So that's the issue," the minister said.

According to S&P Global Commodity Insights, a supportive OPEC+ policy and global robust demand in general has led to a tightening of oil market fundamentals. This was reflected in the recent run up in Platts Dated Brent prices in the mid-$90s/b. But supplies have now started to level off, and this could likely be the beginning of a shift to a flat-to-increasing stock trend from now and into the second quarter of 2024. S&P Global expects Platts Dated Brent to average $88/b in fourth quarter of 2023 and in the low-$80s/b by mid-2024 as tight supply balances soften with recovery late in 2024.

"The eruption of violence in Israel over the weekend and resulting geopolitical tension will keep a bullish bias in oil markets," S&P Global said.

Expanding supply network

Since Russia's invasion of Ukraine in February 2022, Indian refiners have been taking advantage of discounted Russian oil. Moscow has become India's top source of crude oil in 2023. Russian crude flows reached 1.8 million b/d over January-September, accounting for 38% of India's total oil imports, rising from 11.2% during the same period in 2022, according to S&P Global. As a result, the share of Middle Eastern crude decreased from 63%, or 2.9 million b/d, over January-September 2022 to 45%, or 2.1 million b/d, over January-September this year.

Crude oil imports from Russia declined in August and September compared with the second quarter of 2023 due to refinery maintenance and turnaround activities at some refineries. But despite these fluctuations, Russian imports still constituted over 35% of India's total imports, the highest share from a single country.

Russian crude has primarily displaced Middle Eastern barrels, followed by West African crude, in Indian refineries.

"India's crude oil imports from Russia are projected to make up approximately 40%-45% of their overall imports in 2023, which equates to around 1.9 million to 2.2 million b/d, as long as Russian prices remain competitive when compared to alternative sources like the Middle East and Africa," said Sumit Ritolia, refinery economics analyst at S&P Global.

Pain of high prices

Puri said geopolitical uncertainties, including the Russia-Ukraine conflict, would expedite the process of energy transition in favor of sustainable and cleaner fuel sources and away from fossil fuels.

Some analysts also echoed Puri's views.

"With the escalation of war in Israel, oil supply to India may not get impacted as such but the prices of global oil are likely to go up with increasing geopolitical risks," said Vibhuti Garg, director for South Asia at the Institute for Energy Economics and Financial Analysis.

"With all the geopolitical risks it is becoming increasingly important for India to reduce its reliance on oil and other imports of fossil fuels. Or else it will be a huge burden on economy with increasing inflation and current account deficit and dwindling of foreign exchange reserves," she said.

While India is on the path to decarbonize power and transport sectors and other industries, the speed of deployment and investment needs to more than triple now, Garg said.