Spot Crude – India shifts to spot oil, as a new global reality takes over

India is slowly shifting its crude oil procurement to spot buying from long-term contracts. Spot buying of oil picked up in a big way during the recent Middle East crisis, and now India plans to make spot buying a bigger part of its oil procurement model.

What is the oil spot market all about?

For a long time, India purchased oil through long-term contracts with West Asian oil producers like Iraq, Saudi Arabia, UAE, and Kuwait. That model got disrupted when oil prices went up in 2023 and India shifted loyalties to Russia. In the latest month, Russian accounted for 52% of the oil import basket. In a spot purchase, India would typically place crude orders for immediate delivery with one of the big global oil traders like Vitol, Trafigura, Glencore, or Gunvor. These 4 global oil traders move 25-30 million barrels of oil each day. By buying oil in the spot market, India can access crude at short notice.

How spot crude gives India an edge

There are several distinct advantages for India in purchasing crude oil in the spot market. To begin with, it is possible to get real time pricing accuracy and India is not tied down to any specific price for the longer term. Unlike forward contracts, there is no forward premium that has to be paid for spot contracts. In most forward contracts, there is the rollover risk for oil buyers, but that does not exist in spot markets as it is meant for immediate delivery. Since there are number of players offering buy and sell prices for crude on a real time basis, the spreads tend to be narrow. The advantage is that these traders have substantial floating cargoes, allowing quick delivery for spot purchases.

Spot Oil buying is free of national priorities

One of the biggest risks in long-term oil contracts is that oil is a national resource and national priorities can change at short notice. For instance, certain oil suppliers may take a decision to sell less globally to make more oil available domestically. That can impact supplies. Then, there are acts of war that we saw over the last 4 months, which heavily disrupted all cargoes coming from the Middle East and West Asia. There are also the risks of sanctions, as we have seen in recent years. In case of spot buying, national priorities do not enter the picture, and procurement is taken care of by the trading house. Since the oil embargo of 1973, national priorities have been a key factor in oil economics.

Signals an underlying shift in the oil market

Scratch the surface, and India preferring the spot market is indicative of a bigger shift. Oil is moving from being a seller’s market to a buyer’s market with the buyer actually dictating terms. That is where, big buyers like China, India, and Japan have an edge. For the oil producers, it is a race against time. Most of the Middle East nations are sitting on billions of barrels of oil. Five Middle East nations are sitting on 835 billion barrels of proven oil reserves. With increasing shift towards green energy and electrical vehicles, most oil producers are seeing bargaining power slipping from their hands. Spot markets are a more subtle way of announcing that buyers will now call the shots in crude oil.