DNA Money Edit: Diversifying crude basket shouldn't trip trade balance

India has begun to purchase crude oil from the US. Domestic refiners are busy striking deals with the US suppliers as part of their crude diversification strategy. State-owned Indian Oil Corp (IOC) recently struck a deal to buy first shale oil and is looking to step up imports from the US. The crude oil shipment begins nearly two years after the former US President Barack Obama lifted the 40-year-old ban on crude exports. And the current President Donald Trump’s promise of playing the role of a “reliable, long-term supplier” of energy to India’s developmental needs seems to have worked well with the domestic buyers.

India, the world’s third-largest oil importer, has joined Asian counterparts such as Japan, South Korea and China to buy US crude. The government has given clearance to IOC to buy one shipload of US oil every month till March 2018.

In the volatile crude oil business, which fluctuates at the whims and fancies of a few oligopolistic oil producers from the Middle East and West Asia, two aspects may weigh against the US oil purchase: higher freight and longer voyage that extends to 40 days, depending on the coast. Transporting US crude needs very large crude carriers (VLCCs), and they bring in economies of scale. IOC senior officials claimed that buying US crude has become attractive for Indian refiners after the differential between Brent (the benchmark crude that serves as a reference price for buyers in the West) and Dubai (which serves as a benchmark for countries in the East) has narrowed.

While another state-run firm BPCL has already struck a deal for US crude, HPCL is still scouting for a good deal. Indian companies have also contracted 9-million-tonne-per-annum of LNG from the US and the first shipment is expected in January 2018. This will definitely give a push to the bilateral trade, but India should keep a watch on the mounting trade balance with the US.