India may cut its Iranian crude oil imports by 50% to cooperate with U.S. sanctions and secure a waiver to continue shipments, according to a Bloomberg report on Tuesday.
This is a bullish sign for crude oil as major crude importers begin to assess their purchases from Iran ahead of the November 4 deadline.
We anticipate crude oil to continue its upward trend in light of the potential supply reduction.
U.S. Sanctions Add Pressure on India
India cannot completely cut Iranian crude oil supplies as these cargoes are offered at competitive pricing and also represent a meaningful part of their supply.
For India, Iran's oil represents 10% of its total supply, the biggest chunk after Saudi Arabia and Iraq. India imports around 22-27 million tons per year of Iranian crude oil. Indian Oil Corporation (IOC) is the country's biggest refiner and a top client for Iran.
India-Iran energy relationship can be traced back 1965 where they formed a joint venture with National Iranian Oil Company (NIOC) to operate Chennai Petroleum Corp Ltd (CPCL), a refinery complex in India. NIOC holds 51.89% while Iran has 15.40%. CPCL has two refiners with a combined refining capacity of 230,000 barrels a day, which is the equivalent to total capacity of Delek US (DK) , for comparison.
The US administration is likely give waivers to China and India, which together comprise around 50% of Iran's crude oil exports. For Iran, India is its second largest client after China. We saw China last week cutting crude oil from its tariff list, as a sign that US crude oil has a meaningful presence in their economy.
Crude Oil Likely to Continue Rallying Toward Year End
West Texas Intermediate (WTI) crude oil has rallied 15% year-to-date, closely following Brent rally. For investors looking to take a long position in crude oil, we recommend buying the United States Oil ETF (USO) for an outright bet on the commodity.
Volatility players can buy USO 15 January 2019 Calls on a bet that sanctions will have a more powerful effect on supply disruption beyond the November 4 deadline.
Iranian Cuts to Benefit U.S. Gulf Coast Producers
A rally in Brent prices will likely translate in higher prices in U.S. Gulf Coast pricing where there are export facilities and crude oil is priced to the Louisiana Light Sweet (LLS) benchmark. One of our top picks levered to LLS is Stone Energy (SGY) , which recently did a reverse merger with Riverstone Holdings-backed Talos Energy.
This is not likely to be the case with Midland crude, however, given existing bottlenecks. Nevertheless, they could enjoy improved pricing.
Our top Permian Basin picks are Pioneer Natural Resources (PXD) , Concho Resources (CXO) and Carrizo Oil & Gas (CRZO) . For a more sector play we recommend to own the SPDR (XOP) , which has outperformed the S&P 500 over the last six months.
