India is set to import 8 million barrels of Iraqi oil to fill its first strategic petroleum reserve (SPR), taking advantage of cheap prices and lending some support to a market suffering from oversupply.
Country's SPR purchases could temporarily help offset the impact of an expected pause in China's strategic stocks build and the start of spring maintenance at Asian refiners.
The oil ministry on Tuesday instructed state refiners Indian Oil Corp and Hindustan Petroleum Corp Ltd to each seek two very large crude carriers (VLCC) of Basra oil for arrival in May-June, totalling 8 million barrels, two sources familiar with the matter said.
The tenders are to be issued this month and plans call for the federal cabinet to approve issuing tenders at its meeting next week, said one of the sources, who declined to be identified.
A committee of directors suggested Basra oil as it suits refineries on India's east coast, the source said, adding this will be a one-off purchase for the SPR as the stocks will be used only in case of supply disruptions.
The finance ministry has provided 24 billion rupees (about $383 million) from revised budget estimates for the current fiscal year to fill the first SPR.
"In Asia we are trading May cargoes and demand from India for Basra will tighten the prompt market and will make contango in the Asia and Dubai markets narrower," said Ehsan Ul Haq, senior consultant at UK-based consultant KBC Energy Economics.
Benchmark Brent futures have climbed off a six-year low hit in January but are still down more than 50 percent from last June at $53 per barrel.
"It could weaken the price of Brent-linked crudes as traders were expecting India to buy sweet oil for its SPR.
"On the other hand it would be good news for Iraq, which has been struggling to find buyers because of the deteriorating quality of Basra," Haq said.
The world's fourth biggest oil consumer, India last month built its first underground SPR in Andhra Pradesh with a capacity to hold 9.75 million barrels of oil.
The Vizag facility has two compartments of 7.55 million barrels and 2.20 million barrels. The smaller compartment will be used by HPCL for its 166,000 barrel-per-day Vizag refinery.
A total of three SPRs in the south will hold more than 36 million barrels of oil, enough to cover about 13 days' supply for India in case of a supply disruption or extreme price volatility.
The two other SPRs, at Padur and Mangalore in southern Karnataka state, will have a capacity of 29.3 million barrels and are expected to be ready by October.
In addition to HPCL's Vizag refinery, the IOC's 150,000 bpd Haldia refinery and a 210,000 bpd refinery owned by Chennai Petroleum Corp., a subsidiary of IOC, can process Basra oil.