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Published:Monday, April 29, 2019 3:00 PM

Effects of US Sanctions on Iran on Indian Oil & Gas Industry and Economy

Effects of US Sanctions on Iran on Indian Oil & Gas Industry and Economy

In November 2018, United States imposed biggest sanctions against Iran. Iran responded it an “act of economic war” and will win the economic war. Sanctions were consequence of US’s decision in May 2018 to withdraw from an international deal that sought to limit Iran’s nuclear program in exchange for easing pressure on Iran to unstable the economic conditions.
 
For imposing the sanctions, US’s one of the biggest aims was to reduce Iran petroleum exports to zero & threatened to penalize the buyer of Iranian oil. US blacklisted 50 Iranian banks and subsidiaries, more than 200 people and ships, Iran’s national airline and more than 65 Iranian aircrafts.
 
Thus, with these sanctions in place, Iran’s Oil, Shipping & Banking Industry was about to take significant hit. But to keep oil price in check, US granted Iran’s biggest buyer of crude oil viz. China, India, South Korea, Japan, Italy, Greece, Taiwan & Turkey, sanctions wavier for 6 months effective from 5th November 2018. These 8 countries accounted for 75 % of all Iran’s Oil export. These 8 countries were asked to cut down import quantities so that it affects Iran’s economy.
 
On 22nd April 2019, US declared not to reissue significant reductions exemption (SRE) after they expire on 2nd May 2019, to cut down Iran’s oil export to zero.
 
India-Iran Economic Relations:
 
India and Iran relations have been usually dominated by crude oil trade. During fiscal year 2017-18, bilateral trade stood at USD 13.76 billion, with Indian imports constituting USD 11.11 billion and exports accounting for USD 2.65 billion USD. When US lifted sanctions on Iran in 2016, India increased its share of oil imports from 7% to 13%. For India, Iranian crude is crucial because of subsidized price & 60 days credit facility.
 
India is the 3rd biggest importer of crude oil in the world and Oil consumer in the world. India is the 2nd biggest oil customer of Iran. Before sanction issued in November 2018, India imported volume of 4,50,000 to 5,50,000 bpd. Iranian crude had 10% share in Indian oil imports.  India had to cut down crude import during the temporary sanctions waive off period and imported around 3,00,000 bpd only.
 
Discontinuation of Iranian oil will hurt Indian refineries. As per the market speculations, these sanctions will have negative effect on profits of Indian refineries by over Rs. 2500 Crores. Indian refineries used to get 60 days credit period compared to 30 days credit provided by other supplier, which will impact working capital arrangement for these companies and will impact their profits. Not only Oil refineries, but also many other industries served by these refineries will also face the consequences of the sanctions. Majorly, Transport industry, Aviation, refineries exports will suffer.
 
On 23rd April 2019, Indian Oil & Gas Ministry released a statement regarding the Government of India’s robust plan against the US sanctions on Iran for importing of crude oil, which will ensure adequate crude oil supply to Indian refineries from May 2019. Additional supplies will be procured from other major oil producing countries. As per our analysis, India will exercise rights of “optional volume” contractual clause procuring more from existing suppliers like Saudi Arabia, Iraq. India may also look for non-OPEC countries to make up for shortfall of Iranian crude like US, Russia to avoid “Asian premium” which is paid on importing crude from OPEC countries.
 
Effects on Oil Prices on India Economy
 
3%-5% rise in Oil price is drastically expected in near future and thus Indian exports will suffer as oil is intermediate product for chemical production and transport services. Around 5 % hike in crude oil prices would increase the trade deficit by USD 3.5-4 billions. For instance, trade deficit would extend by 275-285 bps and lower the GDP rate by 0.08% to 0.1% in next financial quarter.
 
Indian currency would also depreciate due to rising current account deficit. Current account deficit would increase by about 0.35 -0.4% of GDP for every $10/bbl. Owing to increase in crude oil price, India’s inflation rate would be increased by 8-10 bps.
 
As per the Market speculations, the increase in international oil prices is a credit negative for the Indian economy given that every $1 per barrel rise in oil price increases the country’s import bill by over $1.4 billion and every $10 per barrel increase in crude oil prices increases the fiscal deficit by about 0.1% of the GDP.
 
Currently, India as country sixth largest economy has been followed by UK, who has 5th rank in the world in terms of economy size. India has been one of the fastest growing economy since last 4-5 years and has witnessed high growth in energy sector. These sanctions on Iran and its ultimate impact on Indian economy will slower the growth pace and India may not be able to overtake UK as predicted by many economists over the world.
 
 
 
Fuel Price Hike after Lok Sabha Elections 2019??
 
Lok Sabha elections have incognito the dynamics of oil market. Major cities have witnessed mere 40-55 paise rise in petrol/diesel prices since 10th March 2019, despite $7/bbl. increase in crude oil prices. Now with sanction on Iran, Oil prices might likely to touch $80-85/bbl with in next few months. It is worse for the health of Indian economy. The above graph shows price trends of US Brent Crude (price in $/bbl.) and Petrol & Diesel (prices in Rs/Liters) Mumbai’s Petrol/Diesel prices have been taken as Mumbai is financial capital of India. Petrol/Diesel prices should have been increased as per the Crude Oil Market. OMC’s have been absorbing mounting losses since early March 2019 and will absorb losses till mid May 2019. After completion of Lok Sabha election 2019, Oil marketing companies would recover the losses from consumer to increase the prices of petro products.
 
As per Infraline analysis, “Petrol & Diesel prices are expected to increase by 5-10 Rs. post Lok Sabha elections 2019”. US sanctions on Iran and less changes of Petrol and diesel selling price in India with in last two months against rise crude oil prices in international market will impact on inflation rate, economy growth, export of Petro products, and other services. There is lot of possibilities that it would be reflected on after completion of current financial quarter “April-June 2019”.  

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