India is too important for oil titan Saudi to ignore

Published 6 March 2019

Commodities markets
expected the worst last week when tensions between India and Pakistan erupted
in a blaze of dogfighting jets in the skies over Kashmir.

A full-blown
conflict between these old adversaries would be hard for resource producers,
especially Saudi Arabia, to shrug off.

That is why
the Middle East’s biggest oil producing superpower was among the first to
despatch its top diplomats to Islamabad to defuse the situation. Minister of
State for Foreign Affairs, Adel Jubeir, was hastily sent with a letter addressed
to Pakistan’s leadership from his master, the Crown Prince Mohammed bin Salman.

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The
symbolism of the message sent directly from the heir to the Saudi throne was
clear: Both sides – armed to the teeth with nuclear arsenals – must pull back
from the brink. Despite the domestic political risks of seeming weak,
Pakistan’s President Imran Khan can’t afford to ignore the kingdom’s voice.
Riyadh recently pledged to invest $20 billion into his country’s struggling
economy.

Without
Saudi Arabia’s support, his government would be almost untenable.

It is hoped that the release before the weekend on the border of a battered and bruised Indian fighter pilot shot down in the recent skirmish will be enough of a peace offering to halt the calls for further bloodletting and retaliation coming from hard-line Indian nationalists. Still, tens of thousands of troops remain poised in a high state of readiness on either side of the frontier.

Target market

The Saudis
have good reason to be anxious. Aside from the prospect of a nuclear clash occurring
on their doorstep, its economy is expected to become increasingly dependent on
India in the decades to come. The world’s biggest democracy now imports around
800,000 b/d of Saudi crude, accounting for just over 10% of its total shipments
abroad. Supplies are also increasing.

This is the main reason behind a colossal investment splurge on building new refineries and energy infrastructure that Saudi now plans in India. The kingdom aims to spend $100 billion in the coming years to help make its state-owned oil producer Saudi Aramco a “household name in India”, according to oil minister Khalid al-Falih. Saudi’s top oil official visited New Delhi earlier this month, just before the escalation of hostilities with Pakistan.

India’s existing refineries are also being increasingly re-tuned to handle more of the heavier Saudi oil, which no longer has such a strong market in the US, amplifying the importance of their relationship.

But Saudi is
not the only major commodities producer exposed to geopolitical turmoil on the
subcontinent. India will need enough refineries to process up to 10 million
barrels per day of crude to meet the demand of its rapidly expanding and
urbanised economy by 2040, according to the government’s own estimates.

Demand for crude is surging in India at a time when traditional industrialised markets in Europe are turning away from oil as a transport fuel by heavily subsidising electric vehicles. India is expected to emerge as the world’s third-largest passenger vehicle market by 2021, with over 500 million people living in cities by the end of the next decade, according to McKinsey.

Coal and gas

However, oil
is not the only reason India matters for commodities markets and producers.
Despite efforts to build more solar power plants, India’s demand for thermal
coal is still expected to grow by almost 4% through to 2023, according to
projections from the International Energy Agency.

Meanwhile,
the government expects gas demand to almost triple by 2030. This will require a
surge in imports by ship of liquefied natural gas from overseas.

“India
is a big player in the oil and LNG market,” said Kang Wu, head of Asia, at
S&P Global Platts Analytics. “Pakistan is an emerging and key regional
market to watch for LNG and fuel oil movements. So industry players will be
keeping a very close eye on the situation there and how it develops.”

Despite the
obvious risks, analysts remain sceptical of a wider impact on commodities.
India and Pakistan glared at each other for decades since their last all-out
war in the early 1970s. The world has learned to live with these geopolitical
risks since the countries were clumsily partitioned by Britain’s hasty
withdrawal from its old empire in 1947.

“I don’t see any immediate direct impact on demand but
if the situation escalates, then things could be different,” warned Wu.

The post India is too important for oil titan Saudi to ignore appeared first on The Barrel Blog.

Source: Platts – The Barrel Blog – India is too important for oil titan Saudi to ignore