InvestorQ : How does India plan to create strategic petroleum reserves in the US?
Priyanka N made post

How does India plan to create strategic petroleum reserves in the US?

NISHA Nayak answered.
1 year ago

India may leverage on the US strategic petroleum reserves (SPR) not only as an emergency measure but also for trading for any price advantage in the future. India and the US have signed agreement in the middle of July. Of course, India will have to pay rental charges to the US for use of the warehouse. This will be a risk over and above the oil price volatility.

For India, it is a trade off. Its SPR in India is too small and already filled to capacity. Building your own strategic reserves involves huge capital. The above deal gives India immediate access to reserves. Of course, if prices fall after creating the reserve, losses have to be booked and irrespective of price movements, rental liability will continue.

The second risk is that if sea routes are obstructed, then a stockpile in the US will hardly make any difference to energy security. It also entails blocking of capital. For the US, this deal could make sense as it assures shale off-take. However, the only question is whether the price is right to create reserves as China was creating SPR at $25/bbl.

However, there is another angle to this. The US is India's sixth-largest oil supplier and India needs to diversify its oil base out of the OPEC. By stacking the US purchases in a US facility, they can avoid the movement cost and also create a diversified portfolio of oil supply. This could be useful if the US shale suppliers come under oversupply pressures.