Published: Wed, October 10, 2018
Markets | By Otis Pena

Saudi Arabia to supply extra oil to India as Iran sanctions loom

Saudi Arabia to supply extra oil to India as Iran sanctions loom

Oil dropped below $83 a barrel on Monday, pressured by expectations that some Iranian oil exports will keep flowing after the USA reimposes sanctions, easing a strain on supplies. While private companies like Reliance and Nayara Energy (Essar) have had to drastically reduce their purchases, public sector companies, who are more immune to us strictures, and already have alternate banking arrangements and a "rupee-rial" mechanism, are staying the course for now. The Trump administration is considering waivers on sanctions, a US government official said on Friday.

The country previously held oil in storage at Dalian during the last round of sanctions in 2014 that was later sold to buyers in South Korea and India.

The world's third-largest oil importer, India relies upon Iran for 9.4% of its crude supplies: in 2017-18 the country brought in 220.4 million metric tonnes of oil from a number of sources.

After going ahead with the S-400 missile deal with Russian Federation despite the United States threat of sanctions, reports now suggest that India may continue buying oil from Iran even after the sectoral sanction imposed by the U.S. begin on November 4. Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was also "chatter that Saudi Arabia has replaced all of Iran's lost oil".

Companies had turned off daily production of about 670,800 barrels of oil and 726 million cubic feet of natural gas by midday on Tuesday, according to offshore regulator the Bureau of Safety and Environmental Enforcement.

The U.S. has since said it could consider exemptions for countries that have already shown efforts to reduce their imports of Iranian oil.

With the European Union considering the creation of a "special goal vehicle" before November to facilitate trade with Iran, India hopes to find a way to settle payments to Tehran. The global benchmark hit a four-year high of $86.74 last week but slipped as low as $82.66 on Monday.

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President Trump made a decision to leave the deal and reimpose sanctions.

The IMF, however, predicted Iran's economy will sink deep in the red due to renewed U.S. sanctions. This likely means we won't see any serious buying this week unless the price is right.

"India is continuing with its relationship with both its key energy partners Iran and the USA", a second source said.

UCO Bank had in the previous round of sanctions handled rupee payments.

Although countries like Turkey, Russia, and China have indicated they will go ahead with their oil trade with Iran, the European Union will probably accede in a large measure, given the exposure of their companies to the USA banking system.

The softer stance on Iran plus news that Saudi Arabia and Russian Federation could ramp up oil production to compensate for the sanctions has lowered oil prices slightly.

Besides blocking of banking channels from November, the absence of payment mechanism may pose a challenge to the transportation of the oil as Iranian crude is bought on a CIF basis and shipped on Iranian tankers.

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