India, Pakistan Brace for Oil Price Surge, Seek New Oil Suppliers
India and Pakistan are weighing their options in case the Israel-Iran conflict disrupts oil supplies through key chokepoints.
While many analysts are still not convinced that Iran can actually afford to close the Strait of Hormuz, as it has threatened, it’s a big gamble, and Indian refiners are making backup plans. Indian refiners are considering supplies from West African producers and other alternative energy sources as the world’s second-largest importer of crude grows wary of the unfolding situation. Meanwhile, India’s neighbor, Pakistan, is exploring pipeline oil supplies from the UAE and Saudi Arabia.
The Strait of Hormuz handles more than 20 million barrels of crude per day, with the bulk of Middle Eastern oil passing through the channel en route to international markets. Top oil ministry officials and industry executives have been evaluating possible supply alternatives and scenarios if Hormuz is blocked. Approximately 40% of India’s crude and 54% of LNG imports would be directly impacted if the Strait of Hormuz is closed.
However, India’s energy executives remain optimistic that Iran won’t enforce a blockade, encouraged by historic precedent. A closure would almost inevitably send global oil prices soaring, alienating other oil-import-dependent countries and potentially drawing the United States into a direct confrontation with Iran.
According to estimates by the experts, oil prices could soar to $100 to $150 per barrel if the Strait of Hormuz is blocked. A top Indian executive has, however, reported that Indian refiners have yet to resort to panic buying of crude, which can potentially drive global prices higher. India imports~90% of its crude, with a little over 40% from the Gulf, 35% from Russia, and the rest from Africa, the United States, and other sources.
That said, India will have a harder time finding alternative supplies for Middle Eastern gas, thanks to the global LNG market being much less evolved than crude markets. Further, India maintains strategic crude reserves but lacks strategic gas storage. According to India’s oil ministry, the country’s total crude and petroleum products storage capacity is enough to supply the country for 74 days, including the country’s strategic reserves that can meet 9.5 days of demand.
The situation appears to be less dire in Pakistan, although the country’s top energy officials are also negotiating with international oil suppliers for alternative supplies. Pakistan can potentially store oil in its abandoned power plants, whose furnace oil storage is estimated to have capacity to hold up to a million tons of oil. There’s a proposal to purchase these storage units, which the power sector planned to dispose of by selling as scrap. Pakistan’s Prime Minister Shehbaz Sharif has established a committee to monitor the evolving situation and assess its impact on the country’s oil market.
Boosting Domestic Production
India may resort to buying more Russian oil if the situation in the Middle East deteriorates. Last year, India surpassed China to become the biggest importer of Russian oil. Over the past three years, Indian refiners have been buying discounted Russian crude ever since the West imposed wide-ranging sanctions on Russian energy commodities following its invasion of Ukraine. For years, Russia’s crude exports to India have been avoiding the Strait of Hormuz due to long-standing tensions between the United States and Iran.
India could, however, decide to look in the opposite direction. Last year, Indian Prime Minister Narendra Modi said during a visit to Guyana that India views the South American nation as key to India’s energy security, adding that he will encourage Indian companies to invest in Guyana. Guyana’s Natural Resources Minister Vickram Bharrat said that his country is willing to become a crude supplier to India if Exxon Mobil (NYSE:XOM) agrees to the arrangement. Exxon is the main operator in Guyana’s offshore oil production.
“We know Exxon has to do some amount of changes to their lifting schedule and logistics because their preference is for the very large vessels that can accommodate two million barrels mainly because of distance and cost,” Bharrat said.
However, a longer-term solution for India would be to boost its domestic oil production. Earlier in the year, Indian financial services firm Motilal Oswal suggested that India could ramp up local production to circumvent tariffs by the Trump administration. Further, India’s heavy reliance on oil imports weakens the rupee. Last year, S&P Global Commodity Insights provided estimates that India’s four basins could hold up to 22 billion barrels of crude, more oil than the Permian Basin’s remaining reserves. Currently, India has explored just 10% of its 3.36 million sq km wide sedimentary basin.