Iran is threatening to cut off its oil supplies to India next month unless a row over payment is settled.
Iran currently supplies 400,000 bpd to India, 12% of its crude oil, this potentially could have serious implications for the wider Asian economy if it is not settled expediently as it could put pressure on supply and drive up prices.
The payment row has escalated ever since trading sanctions were imposed on Iran by the US and the EU. Under US pressure, the Reserve Bank of India halted a clearing mechanism it used to pay Iran for its oil, however, this has left an unpaid bill of some US$ 5 billion as India has not paid Iran since December. Unsurprisingly, Iran has finally said enough is enough. Supply will not be resumed until a future payment method is established.
For the moment, India seems unconcerned by this, K Murali, Hindustan Petroleum's head of refineries and international trade said, “We will draw more from other suppliers with whom we have term deals. The year has just begun.”
In the short term India may well be able to source the necessary 400,000 bpd from Saudi Arabia or other Gulf producers. The Saudis are pumping more than their established quota to try to alleviate the price rises that the world has been seeing but with extra demand for 400,000 bpd, OPEC is hardly likely to see any incentive to increase production. Iran will not benefit either as it is fairly limited as to who it can sell oil. With trade sanctions in place, Europe and the US are closed to Iran so they must turn to Asia; any buyer worth their salt will expect a heavy discount on Iranian crude, so Iran is unlikely to receive market price.