(Editor’s Note: Updated with a nut graph at paragraphs six and seven.)

By Deepak Sharma

New Delhi: Saudi Arabia, the world’s largest exporter of crude oil, might offer a discount to Indian and other Asian buyers this month as a part of its strategy to ensure full compliance from the Organisation of Petroleum Exporting Countries (OPEC) members to the mutually agreed historic production signed in April this year.

To ensure full compliance from some countries, who have been continuously breaching their production limits, Saudi Arabia might take some punitive measures, including flooding the market with higher supplies or offering discounts to make it difficult for them (non-complying members) to sell their crude in the international market.

“Saudi Arabia has spare capacity, and it could also cut the price to some of its crudes particularly to Asian buyers, who have been ramping purchases from African countries following the re-imposition of the trade sanctions on Iran by Trump Administration,” said a crude oil dealer based in Dubai and has operations in Saudi Arabia and Iraq.

India, which relies on import to meet around 85 per cent of its crude oil requirement from imports, have been trying to diversify its oil supply sources. It has been continuously reducing its dependence on hydrocarbon imports from the Gulf region.

Imports from gulf countries accounted for around 60 per cent or 2.68 million barrels of oil per day (BPD) of the total 4.48 million BPD imported by India. As a result of diversification process initiated by the Indian government, crude oil import from Africa, mainly from Nigeria, rose by 7.3 per cent to 713,00 BPD while supplies from the United States jumps by over 63 per cent to 181,000 BPD.

Discount on Saudi Arabia crude, preferred by most Asian refiners, could improve refining margins of Indian companies and make their products more competitive in the global market.

Despite being a major importer of crude, India is a leading exporter of petroleum products. India’s refining capacity has increased from 232 million tonnes in 2015 to around 250 million tonnes by March 2020, much higher than the country’s fuel demand of around 213 million tonnes in 2019-20.

According to the source, offering a discount to the key buyers of crude from the non-complying countries is the most effective way to discipline them as increasing supplies would require pumping more oil and that will impact global prices and all petroleum exporting countries will suffer.

As per information available, Iraq, Angola, and Nigeria are three countries that have been continuously overshooting their production targets, and are not fully complying with the production cut agreement.

So far, Iraq only managed to achieve 70 per cent compliance; Nigeria did a little better at 77 per cent, and Angola even better at 83 per cent. But with the world already suffering over supply and softening of global crude demand, this is not enough to support prices in the long run.

The talks of offering discount come in the wake of a recent increase in some grade of crude and reduction in allocation by the Saudi’s state-controlled oil giant to some Asian buyers including India. Last month, the world’s largest oil exporter Saudi Aramco has reduced the crude allocation by up to 40 per cent to some Asian buyers after OPEC+ agreed to extend its historic output cuts through July.

According to traders, Saudi grade crude is preferred by Indian refiners and any discount offered by Saudi Arabia will prompt Indian companies to ramp up purchases. Moreover, Saudi Arabia has also shown an inclination towards strengthening bilateral trade between the two countries. Recently Saudi Arabia has also announced various multi-billion-dollar investments in various Indian projects and companies.