Kashmir Conflict Has Riyadh On Edge

Just days after Saudi Arabia's Crown Prince Mohammed bin Salman finished his charm-offensive Asian trip to Pakistan, India, and China, the ever-simmering tensions between Pakistan and India flared up again over Kashmir--the territory the two countries have been disputing since 1947 when Britain partitioned its colonies and India and Pakistan became independent countries.

Commodity, currency, and equity markets were on edge last week while nuclear arsenal owners India and Pakistan were saying they carried out air strikes over the so-called Line of Control--the boundary between Indian and Pakistani areas of control over Kashmir.

The two countries have dialed down hostilities since last week and Pakistan said last Thursday that it would release an Indian pilot it had been holding "as a gesture of peace."  

One of the first countries to send a high-profile official to seek de-escalation of the tension was Saudi Arabia, which had just pledged US$20 billion in investments into Pakistan and another US$100 billion in India, with a large part of these billions of dollars to be invested in the oil industries in both countries.

The world's top crude oil exporter Saudi Arabia cannot easily ignore a potential new conflict between India and Pakistan, as it has strategic interests in both countries, (apart from the obvious worst-case scenario--a nuclear war in its backyard), Andrew Critchlow, head of news in EMEA for S&P Global Platts, writes in a blog post.

Saudi Arabia's Crown Prince Mohammed bin Salman sent last week the Minister of State for Foreign Affairs, Adel al-Jubeir, to Pakistan with a letter to the Pakistani leadership in an attempt to defuse the latest tension.

Days before that, Saudi Arabia signed US$20 billion worth of deals in Pakistan during MBS's visit to the country, including US$8 billion for an oil refinery in the city of Gwadar. Saudi Arabia has also provided US$6 billion in loans to cash-strapped Pakistan, which is struggling with an economic crisis with just US$8 billion in foreign reserves left and is seeking international funding.

After Pakistan, the Saudi crown prince visited India on his second Asian stop in last month's tour, where the Kingdom pledged US$100 billion investments in India's infrastructure and energy industries as it seeks to strengthen its position in the country that is registering the fastest growth in oil demand.

"We want Saudi Aramco to be a household name in India," Energy Minister Khalid al-Falih said, adding that India was the number-one priority for the Kingdom's oil giant. 

Saudi Arabia and its state oil firm are increasingly looking to lock in future sales of its crude oil on the fastest-growing Asian market, by setting up joint ventures to build refineries, in India and China in particular.

India is expected to be the country with the largest additional oil demand through 2040, OPEC said in its 2018 World Oil Outlook published last September. In terms of incremental demand by 2040, India is forecast to be the country with the fastest average demand growth in the world--at 3.7 percent annually, as well as the largest additional demand--5.8 million bpd. Thanks to this fast demand growth, India will likely pass the 10-million-bpd oil demand mark sometime towards the end of the forecast period, OPEC said.

According to the BP Energy Outlook 2019, India's share of total global primary energy demand is set to roughly double to around 11 percent by 2040, underpinned by strong population growth and economic development. Domestic gas production in India is seen rising modestly, but demand is expected to surge by 240 percent by 2040, meaning India's reliance on gas imports is set to continue to grow significantly, BP reckons.

Apart from building strategic relations with Pakistan and India, Saudi Arabia is securing energy deals in the two countries and it can't just shrug off a potential new full-blown conflict.

Most analysts don't expect immediate impact on oil demand in the region, if the tensions are contained, as they are currently. However, experts see why commodity producers, including oil producers, could be anxious over the Kashmir conflict.

"India is a big player in the oil and LNG market. Pakistan is an emerging and key regional market to watch for LNG and fuel oil movements. So industry players will be keeping a very close eye on the situation there and how it develops," Kang Wu, Head of Asia at S&P Global Platts Analytics, said last week.

By arrangement with Oilprice.com