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Updated: Sep 18, 2019 12:32 IST

Fears of a spike in crude prices in the wake of Saturday’s drone attack on Saudi Arabia’s Abqaiq oil facility triggered a sharp fall in India’s stock markets on Tuesday even though Brent Crude prices that jumped 15% to close at $69.02/barrel on Monday, the biggest intra-day jump since 2008, came down on Tuesday to trade at $64.06/barrel at 8.30 pm IST. India is the world’s third largest importer of oil.

Oil minister Dharmendra Pradhan said the development has created some “anxiety”. The events since Saturday are a matter of concerns to India but supplies from Saudi Arabia have not been disrupted, he told reporters after an industry meeting on Tuesday. “We have uplifted more than half of the contracted quantity for September. We uplifted oil yesterday [Monday] and even today [Tuesday],” he added.

Government officials said India was also exploring alternative sources and Russia could be a reliable partner for long-term supply of crude oil.

Still, fears that oil supplies from Saudi Arabia could be hit caused a meltdown in the markets with the BSE Sensex, India’s benchmark index, falling 1.73% over its previous close to end the day at 36,481.09 points. This is the third biggest intra-day fall in percentage terms this year. The BSE Sensex had fallen by 2.06% on September 3 when markets opened after the release of June quarter GDP figures and 8 July when imposition of capital gains taxes announced in the Budget on July 5 led to a large fall. Tuesday’s fall was spread across sectors, with each of BSE’s 19 sub-indices closing lower than previous day’s close. Auto and Realty indices suffered the most, closing 3.8% and 3.7% lower than the previous day’s close.

According to Shrikant S Chouhan, senior vice-president, Equity Technical Research, Kotak Securities, the fall in the Indian currency, crude prices and yield on 10-year bonds were dampening sentiment and “ spooked markets in the second half of the trading session when there was hardly any follow-up buying.”

To be sure, oil plunged nearly 7% in London later after Reuters said Saudi Arabia was close to restoring 70% of the oil production it lost over the weekend.

Chouhan’s reference was to the Indian currency touching a 10-month low in intra-day trading and bond yields falling; falling yields on government bonds indicate a real or perceived crisis in the economy.

To be sure, the panic in Indian markets could have been driven by a comment from MK Surana, chairman of state-owned Hindustan Petroleum Corporation Limited, who said on Monday that petrol and diesel prices could increase by up to ₹5 per litre if crude prices stayed at Monday’s levels. India’s Crude Oil Basket (COB) was priced at $59.35/barrel in August 2019. Average COB price was $66.76/barrel in the period from April to July 2019.

A spike in crude prices can prove to be a double whammy for India as it also leads to a depreciation in the rupee. The country imports more than 80% of crude oil it processes and pays in dollars.

This increases the prices further in rupee terms and has the potential of increasing the current account deficit as well as fiscal strain. India’s crude oil and petroleum imports have been falling compared to what they were a year ago for three consecutive months since June 2019.

Indian government officials said both oil and stock markets reacted sharply more because of sentiment than the actual situation. “The attacks on Saudi Arabian crude oil facilities have certainly disrupted the international oil market and India is also affected as the country is the second biggest supplier of crude oil (to us) after Iraq. But, we have a cushion for 10-15 days, and by then Saudi Arabia will be able to restore most of its supplies,” one official with direct knowledge of the matter said on condition of anonymity.

Indian refiners have crude storage for about 65 days. In addition to that, the country’s strategic reserves can sustain demands of refineries for another 10 days, officials said.

An executive working for a private sector refinery said on condition of anonymity that refineries have crude reserves for 7-10 days, which is sufficient for such contingencies. “Saudi Arabia is expected to restore supply in a week; meanwhile, alternative arrangements are being made in case of any further supply delays from Saudi Arabia,” the executive said.

The chief executive of another private sector refinery in India said, asking not be named, that “the surge in crude and product [such as petrol, diesel and petrochemicals] prices is temporary and situation will improve in a fortnight to a month.”

Citing the reasons for his optimism, he said: “First, global supply is 100 million barrels per day and the current disruption involves just 5 million barrels per day. Secondly, this 5 million barrel facility was meant to de-sulphurise crude to make it lighter. The company is thus unable to supply light crude, but it can supply unprocessed crude to those who have refineries to process such grade of crude. Thirdly, till date no refiner has faced any disruption of supply of crude from Saudi Arabia as the country has significant reserves. Hence, total impact could be around 1-2 million barrels per day, which will be normalised after sometime.”

Pradhan on Tuesday met Igor Sechin, chairman of the management board and CEO of Russian energy company Rosneft and discussed matters related to India’s energy security. “The developments in energy markets, including global crude oil supplies, in the light of the recent attacks on Saudi Aramco’s facilities, was also discussed. In this context, a special focus was on increase of crude oil supplies from Russia to Indian refineries,” an oil ministry official said, asking not to be named.

“Rosneft indicated their readiness to intensify their cooperation aimed at the strengthening of energy security in India and in supplying of high-quality feedstock and crude oil to India,” the official added.

Pradhan welcomed the ongoing discussions between Indian oil marketing companies and Rosneft to finalize a term-contract for the supply of Russian crude oil to India, and mentioned that this is part of India’s efforts to diversify its sources of crude oil, the official said.

Former chairman of the Oil and Natural gas Corporation (ONGC), RS Sharma, said: “India is vulnerable to such oil disruptions because it is heavily dependent on imported oil. Although, the current reaction is more out of sentiment, situation could be grim if the geopolitical tension escalates.”

While there is no immediate threat of an oil shortage-driven spike in prices, some experts believe that the attack on Saudi oil facilities could give a structural push to oil prices. “In the long term, oil prices will likely add a geopolitical risk premium of at least $5 to $10 into the price until the odds of another strike are reduced,” Rob Thummel, managing director at Tortoise Advisors, a firm that makes energy investments, told The New York Times. COB prices have been increasing in India every year after they crashed to $46.17/barrel in 2015-16. The average price of COB was $47.56 in 2016-17, $56.43 in 2017-18 and $69.88 in 2018-19.

A day after US President Donald Trump appeared to point the finger at Iran, which denies the accusations that it was behind the attack, he appeared to temper his warning.

Trump said he was ready to help Riyadh following the strikes, but would await a “definitive” determination on who was responsible.

(Bloomberg contributed to this story)