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Page added on July 28, 2016

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Drop in the ocean: India’s strategic oil reserves unlikely to stir market

Public Policy

India’s initial plan to build-up its strategic petroleum reserves (SPR) is not shaping out to be the dramatic event that some in the market had hoped could help reignite global oil demand.

While New Delhi has not shown its full hand in revealing its intentions, the first reports that SPRs might provide 90 days of net import coverage had stoked industry hopes of an important new pillar of oil demand.

Indications now, however, are for much far less than this: shipping brokers say it’s possible the entire initial SPR build-up in the world’s third-biggest oil consumer could be handled by just a handful of Very Large Crude Carrier (VLCC) tankers.

Indeed, India’s initial SPR plan pales in comparison to a programme that is ten-fold bigger in China and is a further sign that Asia’s demand outlook may not be as strong as expected.

“I don’t see the Indian SPR having much movement on crude prices, mainly being that there is so much crude available,” said Matt Stanley of brokerage Freight Investor Services (FIS) in Dubai.

India initially plans to build up oil reserves of 5 million tonnes (almost 40 million barrels) at three locations – Visakhapatnam, Padur and Mangalore – equivalent to almost 10 days of its average daily imports of 4 million bpd.

About 1 million tonnes of crude has been filled at the Visakhapatnam site, according to Indian Strategic Petroleum Reserves Limited, a special purpose company managing construction of the reserve facilities.

Construction and commissioning at the other two sites is in the process of being completed.

Building up India’s initial crude storage requirements equates to 220,000 barrels a day (bpd) of tanker demand, according to a report by Braemar ACM Shipbroking.

This amount “could theoretically be covered by two or three VLCCs if all came from the Middle East,” said Lars Spangberg, a tanker broker at Switzerland’s Ifchor Tankers.

There are also doubts about whether India’s SPR purchases will be met by existing supplies. Instead, they might come from new production, meaning that they would not tighten the global oil market.

“The new storage facilities could stimulate an increase in crude oil production from countries like Iran which are ready to add new oil to an already over supplied market,” said Luigi Bruzzone of shipping brokerage Banchero Costa (Bancosta).

DWARFED BY CHINA’S PROGRAMME

With the global oil market suffering from two years of oversupply, India has been touted as having the potential to pick up any slack from China and help rebalance the market.

Even though India’s oil demand growth is strong, its SPR programme is dwarfed by an estimated 400 million barrels of crude China has imported over the past few years to build its own SPRs, which are equivalent to some 60 days of its 7.4 million bpd imports.

It is also tiny when compared to the United States, where reserves stand at almost 400 days of its daily imports of over 8 million bpd.

Shipping industry hopes that India’s SPR programme could lift tanker charter rates are also set to be disappointed.

“Unfortunately, India is too close to the Middle East for this to make a big impression on the tanker market,” Spangberg said, although he said that some of the crude could be chartered from West Africa.

Both India’s and China’s SPRs remain smaller than those of International Energy Agency (IEA) members, where import-dependent countries are required to hold reserves equivalent to at least 90 days of net import demand.

In the longer term, however, the impact may be bigger.

Both of Asia’s biggest oil importers want to mirror the IEA policy to have 90 days worth of import requirements in reserves.

Reuters



11 Comments on "Drop in the ocean: India’s strategic oil reserves unlikely to stir market"

  1. rockman on Thu, 28th Jul 2016 8:33 am 

    Can’t dig it up now but unless the deal has changed according to a several month old story India won’t be buying their SPR oil on the open market. A ME exporter will provide the oil FOR FREE. From last February:

    In an oil sector first, the oil-rich United Arab Emirates (UAE) has offered free oil to India in return for a storage deal at India’s planned underground facility as the supply glut worsens and some analysts predict that ‘’peak storage” could sending prices crashing further.

    The UAE’s Abu Dhabi National Oil Company (ADNOC) has agreed to store crude oil in India’s maiden strategic storage facility, sweetening the deal by saying India could take two-thirds of the oil for free.

    It’s a great deal for India, which is almost fully reliant on imports to meet its crude oil needs.

  2. yoshua on Thu, 28th Jul 2016 12:01 pm 

    The oil to gold ratio has historically been on average 20:1 or 20 barrels of oil to 1 ounce of gold.

    Today the ratio is 33:1 so oil has never been this cheap. Now is the time to sell gold and buy oil and store it in tankers off-shore or in coke bottles at home.

  3. GregT on Thu, 28th Jul 2016 1:53 pm 

    “Now is the time to sell gold and buy oil and store it in tankers off-shore or in coke bottles at home.”

    Now is a good time to trade paper for physical gold.

  4. JuanP on Thu, 28th Jul 2016 2:10 pm 

    Yoshua, I am buying gold not selling it. I am buying silver, too. Do you really expect me to store Coke bottles full of oil? LOL!

  5. rockman on Thu, 28th Jul 2016 2:12 pm 

    yoshua – Which is the primary reason oil storage is so high: not for a lack of buyers but just the opposite: the large numbers of buyers playing the contango angle. If it weren’t for them oil prices might be even lower.

  6. yoshua on Thu, 28th Jul 2016 4:45 pm 

    rockman – “Tight oil companies spend 4 times more than they earn”. How crazy is that ?

    http://www.zerohedge.com/news/2016-07-28/oil-industry-about-be-burned-again-fall-oil-prices

    Gold is expensive today. “The ratio of gold vs. spot commodities has soared to a new all time high”. At least they’ve managed to pump up the price of gold… or is everything collapsing against gold ?

    Sometimes it’s impossible to know if they are manipulating prices or if they have the control of the manipulations.

    But what the hell we are still alive.

  7. yoshua on Thu, 28th Jul 2016 4:47 pm 

    Sometimes it’s impossible to know if they are manipulating prices or if they have lost control of the manipulations.

  8. Go Speed Racer on Thu, 28th Jul 2016 8:15 pm 

    I got an old 55 gallon drum they can have. Bit of rust on the bottom. It holds oil, no leaks. can be their strategic petroleum reserve.

  9. GregT on Thu, 28th Jul 2016 11:55 pm 

    The value of fiat money is measured in how much gold it will buy. Not the other way around. When Nixon slammed shut the gold window in ’71, 35 US dollars would buy 1 ounce of gold bullion. Today it takes over 1300 US dollars to buy that same ounce of gold. It is not the gold that has increased in value. It is the fiat money that has lost it’s worth.

  10. GregT on Thu, 28th Jul 2016 11:55 pm 

    The value of fiat money is measured in how much gold it will buy. Not the other way around. When Nixon slammed shut the gold window in ’71, 35 US dollars would buy 1 ounce of gold bullion. Today it takes over 1300 US dollars to buy that same ounce of gold. It is not the gold that has increased in value. It is the fiat money that has lost it’s worth.

  11. makati1 on Fri, 29th Jul 2016 1:08 am 

    I remember when 12 oz cokes were 5 cents plus 2 cents deposit. Candy bars were also 5 cents and larger than today’s. The USD is about to vanish in worth. I hope you are not holding too many when that day comes.

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