India joins global coordinated effort to curb international oil prices: Is the move likely to work?
India has agreed to release 5 million barrels of crude oil from its emergency stockpile as part of a coordinated effort between countries including the US, China, Japan and others in a bid to cool down international crude oil prices, the government announced yesterday.
“This release will happen in parallel and in consultation with other major global energy consumers including the USA, People’s Republic of China, Japan and the Republic of Korea [South Korea],” the Ministry of Petroleum and Natural Gas said on Tuesday.
According to reports, the move to release 5 million barrels of emergency reserves – the rough equivalent of a day’s consumption in India – will be the first time that the country is doing so.
India stores its oil reserves in underground caverns at three locations – 1.33 million tonnes at Visakhapatnam in Andhra Pradesh, 1.5 million tonnes at Mangalore and 2.5 million tonnes at Padur, both in Karnataka. The reserves will be released to state-run refiners Hindustan Petroleum and Mangalore Refinery and Petrochemicals Ltd (MRPL).
What’s the rationale behind the move?
“India strongly believes that the pricing of liquid hydrocarbons should be reasonable, responsible and be determined by market forces,” said the petroleum ministry. “India has repeatedly expressed concern at supply of oil being artificially adjusted below demand levels by oil producing countries, leading to rising prices and negative attendant consequences.”
For weeks now, the US, along with other fellow members of the International Energy Agency (India is an associate member), have called on OPEC+ producers to boost crude oil production and drive down prices of crude that, in October, reached a three-year high of $86 per barrel.
The US has announced the release of 50 million barrels of oil in a loan and sale arrangement with its domestic refineries while South Korea and Japan have indicated they will disclose details of their own release of oil reserves following consultations with the US and other allies.
The coordinated move is widely regarded as a warning to OPEC members and other large oil producers that they must address concerns over rising crude prices which have increased by over 50 per cent this year.
OPEC+, which includes Saudi Arabia and Russia, has consistently ignored demands from their consumers to pump more oil. The grouping is scheduled to meet on December 2 but there doesn’t appear to be any indication that they will do a U-turn on their current plan to gradually increase production by 400,000 barrels per day (BPD). Amid fears that further COVID-19 outbreaks may depress demand, Washington and its allies believe this rate of production increase is too slow.
India depends on oil imports to fulfil 85 per cent of its energy requirements with OPEC accounting for a large majority of these. The country, reportedly, imports around 226 million tonnes of crude oil every year. On the back of rising crude prices, the cost of retail fuel has risen markedly in the country with petrol, reportedly, now selling at Rs 104 per litre and diesel at Rs 86.7 per litre in the national capital.
However, the move to tap into strategic reserves, in the view of some analysts, may not make much of a dent especially if OPEC+ countries respond by cancelling plans to increase oil production from their own reserves.
In a note, Goldman Sachs commented that the coordinated release may contribute just between 70 million to 80 million barrels of crude oil, significantly less than the over 100 million barrels the market has already priced in.
“On our pricing model, such a release would be worth less than $2/bbl, significantly less than the $8/bbl sell-off that occurred since late October. A drop in the ocean,” the bank said on November 23.
