Russia oil discount to India shrinks as China sucks supply

Russia emerged as a major supplier to Indian refiners for the first time in FY23 after it started offering discounts amid the Ukraine war.  (MINT_PRINT)
Russia emerged as a major supplier to Indian refiners for the first time in FY23 after it started offering discounts amid the Ukraine war. (MINT_PRINT)

Summary

India secured discounts of as much as $20 a barrel, which has fallen below $10 and has touched even $5

NEW DELHI : The steep discounts India enjoyed on Russian crude oil through most of FY23 have plunged, two government officials aware of the development said, as China boosted purchases and oil producers cut production.

As Russia scrambled for buyers after its invasion of Ukraine sparked Western sanctions, India stepped up as a new major buyer, securing discounts of as much as $15-20 a barrel. This has since fallen below $10 and has touched even $5, the officials cited above said on the condition of anonymity.

“With Russian oil finding more buyers, the discounts to Indian refiners have been coming down. Earlier, we were getting discounts that varied from cargo to cargo," said one of the two officials cited above, all of whom spoke on condition of anonymity.

Until now, Indian refiners used to get Russian oil at an average discount of $15-20 per barrel on a delivered-at-place (DAP) basis, where the seller bears the transportation risk for delivering at the designated port. This discount varies from cargo to cargo, and a sub-$10 per barrel discount seems to have become the new normal for India, the world’s third-largest oil importer.

China, the world’s second-largest oil buyer, recently turned one of the top buyers of Russian oil as it reopened its economy after the pandemic setback. According to Chinese government data, Russia overtook Saudi Arabia to become its top oil supplier during January and February 2023. Imports from Russia stood at 15.68 million tonnes in January-February, or 1.94 million barrels per day (mbpd), up 23.8% from 1.57 mbpd in the corresponding period of last year, showed the data from China’s General Administration of Customs released in March. Also, this comes in the backdrop of a $60 per barrel price cap imposed by a US-led global initiative along with G7 countries, the European Union and Australia that was to be revised in March.

“We used to get around $15-20 per barrel discount on Russian oil cargoes depending on what used to be the price in the spot market. That discount has become less now," the second official added.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) plus grouping, including Russia, has announced an additional 1.16 million barrels per day of supply cut that takes effect next month. On Thursday, Brent was trading at $74.56 a barrel and West Texas Intermediate (WTI) at $77,97 a barrel at press time. The cost of the Indian basket of crude, comprising Oman, Dubai and Brent crude, was $84.3 per barrel in April, according to Petroleum Planning & Analysis Cell (PPAC) data.“The discounts are below the $10 per barrel level and differ from cargo to cargo. We have been getting a discount of around $8 per barrel now," an executive at a state-run refiner said.

Russia emerged as a major supplier to Indian refiners for the first time in FY23 after it started offering discounts amid the Ukraine war. This put the Russian Federation at the second spot for Indian oil imports in the 11 months till February last fiscal, with India buying crude oil worth $27 billion from its strategic partner. The discounted Russian oil also helped India meet the growing demand for petroleum products, with 222.30 million tonnes of petroleum products consumed in FY23, 10.2% higher than the year before.

“With the discounts coming down, the market is feeling the reduction of discounts on the Russian oil," an executive at another state-run refiner said.

The heavy discounts also helped state-run refiners improve their gross refining margins (GRM). Mint earlier reported about state-run oil refiners more than doubling their refining margins in the nine months to December, benefiting from the lower costs of imported crude oil from Russia. According to PPAC data, Indian Oil Corp.’s GRM rose from $8.52 to $21.08 per barrel, Hindustan Petroleum Corp. from $4.50 to $11.40 per barrel, Bharat Petroleum Corp. from $6.78 to $20.08 per barrel, and Mangalore Refinery and Petrochemicals Ltd from $5.80 to $11.70 per barrel.

Queries emailed to the spokespeople for India’s petroleum and natural gas ministry, Rosneft, Russian Federation Embassy in New Delhi, Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd, Nayara Energy Ltd and Reliance Industries Ltd on 25 April remained unanswered till press time.

India is a key Asian refining hub, with an installed capacity of more than 249.36 million tonnes per annum (mtpa) across its 23 refineries. The country plans to grow its refining capacity to 400 mtpa by 2025. Large Indian refiners include Indian Oil Corp., Bharat Petroleum Corp., Hindustan Petroleum Corp., Nayara Energy Ltd (formerly Essar Oil), and Reliance Industries Ltd. India’s import of crude oil and petroleum products rose 29.5% to $209.57 billion in FY23.

According to an S&P Global Commodity Insights Report released last month, the supply of Russian ESPO blend crude to China has surged since Russia’s invasion of Ukraine. Prior to Russia’s invasion of Ukraine, Aframax freight from Kozmino in Russia to North China was less than $500,000, and it has since jumped fourfold to more than $2 million and is set to rise further, the report said. Russia has been consistently exporting more than 3 million tonnes per month of ESPO crude from Kozmino, with shipments in January climbing close to 4 million tonnes.

Apart from its major oil suppliers such as Iraq, Russia, Saudi Arabia, the UAE and US, India has been trying to diversify its oil supplies by procuring from countries such as Colombia, Brazil, Libya, Gabon and Equatorial Guinea, taking the total number of crude oil suppliers to 39. However, with India dependent on imports for as much as 87% of its oil needs and 55% of its natural gas demand, record-high energy prices are a big concern for the country.

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