US plan to end sanctions waiver of Iran, India to be impacted

In a statement last week, the White House Secretary of State Mike Pompeo announced that five countries - India, China, Japan, South Korea and Turkey will no longer be exempt from US sanctions if they continue to import oil from Iran after their waivers end on the 2nd of May and clearing the way for American economic penalties against all companies or financial institutions that continue to take part in transactions linked to buying Iranian oil. 

What happened in Oct-Nov 2018? 

US President Trump imposed sanctions on Iran after he made the US pull out of the Obama-led Iran nuclear deal of 2015. The 2015 deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), lifts sanctions on Iran in exchange for the country ensuring its nuclear programme is “exclusively peaceful”. It however, granted a six-month waiver from sanctions to 8 countries - China, India, Japan, South Korea, Taiwan, Turkey, Italy, and Greece - but with a condition that they would reduce their purchases of Iranian oil. Three of those — Taiwan, Italy and Greece — never used their waivers and have ended Iranian oil imports. The waiver began in November 2018 and was to expire on May 2. Crude prices fell from 85$ to 50$

Impact on India  

India is the world's second-biggest crude oil importer and meets more than 80% of its oil needs through imports and second biggest buyer of Iranian crude oil after China. Iran supplied more than a tenth of its oil needs. India, absorbed around 9.5% of global trade flows last year. The country has been recently switching to new suppliers of crude oil, having an impact to the rest of the global market. Data available by IHS Markit's Commodities suggests, the country used to import around 9.5 million barrels (Mnbbl) of Iranian crude oil per month in 2017, which then reached 11.7 Mnbbl in 2018. But the bilateral trade between the two has been rather volatile, with a strongly declining trend developed in the second half of last year.

The attraction of Iranian oil is on two counts.

First, India stands to lose Rs 2,500 crore if it stops to import crude from Iran. The reason is the lucrative terms offered by Iran which includes discounted oil price, up to 60-day credit and free insurance.

, Iranian oil (along with Venezuelan) is considered “sour”, so refining margins are very attractive in contrast to “sweet” crude from Saudi Arabia or the UAE. Finding replacement for Iranian “sour” crude is also necessary, otherwise refineries will have to incur expenses to make changes in their plants for switching from refining “sour” to “sweet” crude oil. Under the waiver, India was reportedly allowed to import 300,000 b barrels per day. India will suffer quite a bit, because its refiners are configured for the particular variety of Iranian crude.

Impact on inflation: If crude prices go higher, currencies in India may weaken and inflation could accelerate. It is estimated that 10 per cent increase in oil price will increase the trade deficit by USD 7 billion, that is trade deficit will widen by 560 bps and lower GDP by 0.2 per cent. This will in turn weigh on the rupee too, which is expected to depreciate further, making the import much costlier. 

Impact on stocks: A lot of Indian companies depend on healthy crude oil prices. This includes tyre, lubricants, footwear, refining and airline companies. The profitability of these companies is adversely affected due to higher input costs. This could negatively impact stock prices in the near term. On the other hand, oil exploration companies in the country could benefit from a rise in oil prices.

 What will India's strategy be?

India's crude imports from Iran are already down significantly as it had cut its crude imports from Iran by about 40% in December. The shortfall will be made from alternate supply sources available in Saudi Arabia, Kuwait, UAE, Nigeria, Latin America and the US.The UAE and Saudi Arabia have told the Indian government that they would ensure adequate supply of oil to meet India’ needs. India can also pressurize America to get Saudi Arabia to restore the OPEC+ 1.2 million bpd cut. 

Whatever be India's course of action, it will have an impact on India-Iran ties and in the event of India cutting all oil purchases, could even affect the Indian stake in Chabahar port. Going forward, the best option for India is to obtain explicit exemption from the US to import oil from Iran.


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