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Tuesday, April 20, 2021

Explained: Why are state-run OMCs planning to cut oil imports from Saudi Arabia?

Why are state-owned OMCs planning to cut imports from Saudi Arabia? How have rising crude oil pieces impacted India? We explain

Written by Karunjit Singh , Edited by Explained Desk | New Delhi |
Updated: March 22, 2021 9:56:08 am
Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.

State-owned oil marketing companies are set to cut crude oil imports from Saudi Arabia in response to sustained production cuts by the OPEC+ countries amid rising crude oil prices. We examine the background and impact of this move.

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Why are state-owned OMCs planning to cut imports from Saudi Arabia?

OPEC+, a group of 23 major oil-producing countries that had cut crude oil production levels during the peak of the Covid-19 pandemic as the price of Brent crude fell to below $20 per barrel, have decided to maintain lower production levels through April despite crude oil prices recovering to pre-pandemic levels. A consistent rise in crude oil prices has contributed to auto fuel prices reaching record highs in India as it import over 80 per cent of its crude oil requirements. Saudi Arabia alone has extended a 1 million barrel per day production cut through April contributing to elevated crude oil prices.

Petroleum minister Dharmendra Pradhan has repeatedly called on oil-producing countries to withdraw production cuts noting that high crude oil pieces were slowing the economic recovery after the Covid-19 pandemic, particularly in developing countries. The price of Brent crude has risen from about $40 per barrel in October to over $62 per barrel on Friday. Earlier in March, Brent crude temporarily surpassed the $70 per barrel mark.

Saudi energy minister Prince Abdulaziz bin Salman has said that India should use its strategic petroleum reserves which were filled with cheap crude in the first quarter of this fiscal.

How have rising crude oil pieces impacted India?

A consistent rise in crude oil pieces has led to the prices of petrol and diesel reaching record high level across India with the price of petrol crossing Rs 100 per litre in some parts of the country. The prices of both petrol and diesel have risen by Rs 7.5 per litre since the beginning of the year despite oil marketing companies partially absorbing the impact of higher crude oil prices. Rising crude oil prices have also magnified the impact of central and state taxes on auto fuels which were hiked significantly in 2020 to boost revenues amid lower economic activity.

A 20-day halt in daily prices revisions by oil marketing companies before a number of state elections has led to state-owned oil marketing companies facing negative marketing margins according to sources aware of developments.

Government officials noted that oil marketing companies are unlikely to keep prices stable at current levels if crude oil pieces remain elevated.

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What is the impact?

Saudi Arabia which has consistently been the second-largest source of crude oil for India after Iraq was displaced by the United States in February. India imported 2.88 million tonnes of crude oil from Saudi Arabia in January according to data collated by the Directorate General of Commercial Intelligence and Statistics. A reduction in crude oil imports from Saudi Arabia would likely lead to increased imports from other gulf countries and the United States according to sources aware of developments.

Saudi Arabia will however continue to be one of the largest sources for the import of crude oil for India due to its geographical proximity and India’s large crude oil requirements. Industry analysts noted that the move to diversify crude oil sourcing was also a tactic to get a better discount on procurement which is generally difficult in a rising crude price environment.

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