After price cap talks, Russian Oil to get expensive, should India be worried?
2 min read . Updated: 29 Jun 2022, 10:49 AM IST
PremiumRussia is expected to hike prices for its oil as strong demand in Asia undermines western powers’ efforts to curb revenues to Moscow’s war machine. India currently buys discounted Russian oil at $30/barrel
After the G-7 leaders agreed to curb Russian oil imports to limit the energy proceeds that Kremlin uses to finance its war machines in Ukraine the country's fuel prices have gone up due to strong demand from Asia. But should India be worried?
The G-7 leaders, comprising Canada, France, Germany, Italy, Japan, the United Kingdom and the United States and representatives of the European Union (EU) have agreed to put a ‘price cap’ on Russian Oil. Even as the contours of the scheme are yet to be decided, reports suggest Russia will be allowed to recover production costs and earn a very small profit for its petroleum products. Putin earned $20bn from oil exports in the month of May.
After the United States, Germany and Japan agreed to explore a price cap on Russian oil exports, eyes are now on India which imports 10% of its oil from Russia. "We have begun talks with India about how a price cap would work and what the implications would be," White House national security adviser Jake Sullivan said on Tuesday.
On the back of this speculation, Russian government data show that the actual price of the nation’s flagship Urals grade has appreciated and averaged $87.49 a barrel between mid-May and mid-June, jumping nearly 20% compared with the corresponding month-earlier period.
A stronger focus on buyers from Asia, and the emergence of smaller trading houses willing to deal with Russia, have helped to maintain oil flows in Russia. In the first 13 days of June, oil exports via pipelines and Russian port facilities operated by state-run Transneft PJSC averaged 4.62 million barrels per day, according to Bloomberg calculations.
Those endorsing the price cap suggest it would not trigger a spike in global oil markets as the aim is to only hit Russia's oil revenues, not the volumes sent to markets. Whereas critics believe, there are many hurdles, including how to enforce the cap, which has never been tried on an exporter as large as Russia, one of the world's top oil producers. Russia could also retaliate by withholding oil from the market, although doing so would likely force producers to cap wells, a costly procedure.
India currently imports 10% of its total crude requirements from Russia, whereas before the Ukraine war Russian oil imports were restricted to just 0.2% of its total oil needs. The surge was on the back of deep discounts being given to India. Thus, Indian refiners have taken advantage of this and purchased Russian crude oil at discount as high as $30 per barrel. Reports say 40% Russian oil was purchased by private firms including Reliance Industries and Rosneft-backed Nayara Energy. India buys the remaining 90% oil from Oman and Dubai and as on 27 June, 2022 India crude basket which comprises of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of Crude oil processed in Indian refineries stands at $112.6 per barrel.
In May, India imported about 800,000 barrels of oil per day from Russia and now rating agency Fitch predicts that imports could soon increase further to 1m barrels per day, or 20% of India’s total imports. According to Bloomberg, India's state-owned oil processor, Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum are attempting to secure six-month supply contacts for Russian crude to India.
