Iraq crisis could impact oil prices in India

Indian government is keeping a close watch on the ongoing crisis in Iraq where terrorist groups led by ISIS (Islamic State in Iraq and Syria) are attacking and capturing regions in the country. Though the crisis hasn’t yet caused any disruption in the country’s crude oil supplies to India, it has the potential to push up global crude prices. In FY14, India imported around 13% of its crude oil from Iraq, the most after Saudi Arabia, which provided for about 20% of the country’s oil imports of 190 million tonnes in the year. India’s dependence on Iraq crude oil surged since FY12 after US sanctions on Iran.

The average price of Indian crude oil basket that was at $106.94/ barrel during April-May has now increased to $110.31/barrel. The surge in the price has been witnessed since the intensification of fighting between militants belonging to the Sunni minority and Iraq security forces.

As per experts, the oil prices may soar if militants — now fighting Iraq’s security forces mostly in northern regions — advance into southern Iraq, which accounts for around three-quarters of the country’s crude production.

Normally, Indian refiners have stock of crude oil ranging from 15 days to nearly a month. Any deficiency in supplies from Iraq could be replenished from other suppliers such as Saudi Arabia and Kuwait, but if disturbances prolong, it could impact Indian refiners.

Escalation of the price of crude oil directly impacts India’s fuel subsidy and could hurt government finances. Due to gradual price increase by the government the losses on diesel have now reduced to Rs 1.62 per litre and the government aims to make the fuel’s price fully market-determined. For instance, if there is an increase in international crude oil price by a dollar, price of diesel in India could rise by roughly 40 paise/ litre.