India - Iran Oil Row

Officials from Iran and India will meet on Friday for talks on a dispute over how India makes payments for $12 billion worth of crude oil imports a year.

The dispute escalated on Wednesday when Tehran refused to sell oil to the world's fourth-biggest crude importer after New Delhi imposed prohibitive new rules. Last week, the Reserve Bank of India said deals with Iran must be settled outside a long-standing Asian Clearing Union system.

Iran is under global pressure over its nuclear programme, and though United Nations sanctions do not forbid the purchase of Iranian oil, the United States has pressed hard for governments and companies to stop dealing with Tehran.

UN sanctions on the financial sector make financing trade and clearing payments difficult. Supply of around 400,000 barrels per day (bpd) of Iranian crude to state-owned refiners and privately owned Essar Oil in India is at risk. This is the equivalent of about 13 percent of the crude processed in India last month.

Is Iran likely to stop supplying India?

Analysts and oil traders expect the two countries to resolve the issue, given the large volume and value of the crude at stake and the difficulties Indian refiners would face in finding alternative supplies.

"They (the United States) have themselves not been willing to sanction crude sales from Iran (to the international market) for the obvious balance of supply and demand," said Samuel Ciszuk at IHS Energy consultancy.

"However, informally they (the United States) have been using financial sanctions as the main tool of pressure to cause uncertainty and insecurity for Iran. They want to make sure no one finds it easy to deal with Iran," he added.

Oil traders in Asia also said they expected sales to resume because a full suspension would be too costly for India. Indian refiners may have to explore alternative payment methods such as open credit or barter trade, one trader said. These are already used by some of Iran's oil trade partners.

Ambika Sharma , deputy secretary general at the Federation of Indian Chambers of Commerce and Industry, said: "The two central banks could look at settling the trade transaction in a currency other than the euro and the U.S. dollar"

India has been one of the top three buyers of Iranian crudes along with China and Japan , and Iran is the second-biggest supplier of crude to India after Saudi Arabia.

What happens if Iran stops supplying India?

Spot prices for alternative crude on physical markets would probably rise as Indian refiners search for suppliers to plug the gap left by the shortfall from Iran. But prices for Iranian crude would probably fall as it looks for new buyers or seeks to boost volumes to existing buyers.

International crude futures could rise on concern that the disruption would become more widespread and that other countries could also struggle to find ways to make payments. Iran's other main Asian buyers said on Thursday, however, they saw no disruption in supply.