Authors: Avanish Verma & Anurag SinghalAnurag Singhal Avanish Verma
The historic Iran deal between Tehran and the six world powers led to a surge of positive sentiments for the Indian economy. The accord blocks Iran’s pathways to assembling a nuclear weapon on short order in return for lifting most of the sanctions on Tehran.
The stock markets gave resounding thumbs up to the deal through a 388 point increase in the benchmark indices. While the global crude prices continue to stumble, the Indian OMCs (oil marketing companies) stand to gain the most on account of low cost oil imports, lower insurance and freight cost and enhanced availability of surplus crude in the global markets.
While the sanctions on Iran meant India could import no more than 9 Mt of crude oil from Iran, its waiver could be a milestone step towards ensuring energy security for India. This can also be a major opportunity for Indian oil majors to enhance their stake in Middle East. New Delhi will no more shy away from claiming its right to invest & develop the Farzad-B gas field with reserves of 21.68 trillion cubic feet , for which masterplan was submitted by ONGC Videsh in 2012.
The long lasting impact of this event on the Indian economy in general and hydrocarbon Industry in particular would be as follows:-
- Reduction in oil import bill, ultimately reducing inflation at the micro level – A $1 drop in crude prices as global markets reduces India`s Subsidy bill by 6300 Crores.
- A credit period of 90 days offered by Iran against the Global Practice of 30 days shall help India enhance its GRM ( Gross Refinery Margin ) by almost 1 $/bbl due to working capital interest costs. Companies like MRPL import upto 30% of their crude from Iran.
- Opportunity for India to repay Iran in Euros
- Brings more certainty in transfer of payments
- Lower Shipping and Insurance Cost
- Reduction in CAD would reduce risk of Rupee Volatility (even as US gears up for Fed Rate Hike).
- Apart from Tangible oil benefits, lifting of economic and financial sanctions against Iran creates new business opportunities for Indian companies in the IT, pharma, commodity, food processing and electronics space. Infrastructure deals between the two nations such as developing Iranian port of Chabahar, on the Gulf of Oman may see completion and would boost new trade route to India & Central Asia.
While it is true that it will take Iran months to ramp up its production capacity, even a modest increase will further widen the demand – supply surplus which currently stands at 2.5 Million Barrels/Day. The low global demand and weakening of Asian economy, more particularly of China will only accelerate the declining global oil demand. Oil experts believe that Crude could touch 40$/ barrel before stabilizing at 50$/Barrel in Long run.
However, not everyone in the Indian economy is smiling. The Indian exporters , primarily dealing with food products such as basmati rice, Soya meal , sugar , barley & meat are having sleepless nights on account of historic compromise reached between Iran and P5+1 nations. Over the last few years Indian exports to Iran from India doubled to almost 5 Billion USD which reduced the trade deficit by 50%. During the sanctions, Iran purchased Indian exports at a premium of up to 20% over global prices. The lifting of sanctions would see Indian exporters compete with European and South American counterparts for Iranian Market. The weakening of Euro would make Indian exports further unattractive for Iran.
About the Authors: Both Avanish and Anurag are alumni of IIM Ahmedabad and hold over eight years of experience in energy power sector, have worked with large national and international corporations. Anurag is also a chartered accountant.
Disclaimer: The opinions expressed within this article are the personal opinions of the authors. The facts and opinions appearing in the article do not reflect the views of The Indian Iris and The Indian Iris does not assume any responsibility or liability for the same.