India Is Buying Discounted Russian Oil, And China Could Be Next

Since March, when Russia’s invasion of Ukraine began, there has been a “substantial increase” in Russian oil deliveries to India, according to industry observers, and New Delhi seems prepared to acquire much more cheap oil from Moscow.

According to them, China, which is already Russia’s largest single importer, is widely expected to buy more oil from Russia at great discounts.

This could result in higher crude prices in the future.

India and China, two of the world’s largest oil importers, have been battling rising petroleum costs since last year. Oil prices have been erratic in recent weeks, fluctuating between gains and losses, but they are still over 80% higher than they were a year ago.

“We believe that China, and to a lesser extent, India will step up to buy heavily discounted Russian crude,” said Matt Smith, lead oil analyst at Kpler.

This would be in sharp contrast to the rhetoric of major foreign nations and corporations against Russian oil. The United States has imposed energy sanctions on Russia as a response of its aggressive and unlawful assault on Ukraine, while the United Kingdom promises to do so before the end of the year. The European Union is also debating whether or not to follow suit.

However, economists predict that sanctions would leave a vacuum in the market, with Russia holding excess crude that it will be unable to sell.

The motives of the Indian government are economic rather than political. In its oil import strategy, India would always search for a bargain.

“Urals crude from Russia is being offered at record discounts, but uptake is limited so far, with Asian oil importers for the most part sticking to traditional suppliers in the Middle East, Latin America and Africa,” the International Energy Agency said on March 17. Urals crude is the main oil blend that Russia exports.

“As of mid-March, we see the potential for 3 million barrels a day of Russian oil supply to be shut in starting from April, but that could increase if restrictions or public condemnation escalate,” the IEA said.

Two weeks ago, a couple of commodity trading businesses, such as Glencore and Vitol, were giving discounts of $30 and $25 per barrel for the Urals mix, according to Ellen Wald, president of Transversal Consulting.

Russian crude cargoes to India were “very uncommon,” Smith noted, with only 12 million barrels delivered in the entire year of 2021.

Since December, Kpler said he hasn’t seen any supplies from Russia to India.

However, he told CNBC in an email that five cargoes of Russian oil, totaling around 6 million barrels, have been loaded and are on their way to India, where they will be discharged in early April.

“This is about half the entire volume discharged last year — a significant uptick,” Smith said.

Since Russia’s invasion of Ukraine on February 24, markets have been roiled by fears of a shortage of oil, as Russia supplies a large portion of the world’s oil and gas.

“Russia oil is still finding a home. Indian refiners have issued several tenders for Urals crude as the discount to Brent continues to rise,” ANZ Research said Friday.

According to the International Energy Agency, Russia exports roughly 5 million barrels of crude oil per day. After the United States and Saudi Arabia, it is the world’s third-largest oil producer.

According to the International Energy Agency, Russia is the world’s largest exporter of oil to global markets and the world’s second-largest crude oil exporter behind Saudi Arabia.

According to analysts and media sources, India may begin buying even more inexpensive oil from Russia at a discount of roughly 20 per cent. That would save more than $20 a barrel based on current petroleum pricing.

According to Samir N. Kapadia, head of trade at government relations consulting firm Vogel Group, India imports crude from Russia at a nominal share of between 2 per cent and 5 per cent every year.

New Delhi has traditionally gotten its petroleum from Iraq, Saudi Arabia, the United Arab Emirates, and Nigeria, but all of them are currently imposing higher prices, he said.

“Today, the Government of India’s motivations are economic, not political. India will always look for a deal in their oil import strategy. It’s hard not to take a 20% discount on crude when you import 80-85% of your oil, particularly on the heels of the pandemic and global growth slowdown,” Kapadia told CNBC in an email.

India would consider its friendship with Russia in removing crude off Russia’s hands, in addition to the benefits of discounts.

“India is the third biggest oil importer in the world and right now, they are weighing their options to work with an old friend,” said Kapadia. India – as well as China – have so far abstained from a United Nations vote to condemn Russia’s invasion of Ukraine.

Both countries have a lengthy and illustrious history. According to Kapadia, Russia has aided India in a number of sectors, including the provision of military and defense-related equipment, which accounts for up to 60% of the Asian country’s requirements. When the former was “broke” in the late 1950s, India turned to Russia for rupee-ruble currency swap arrangements to finance its imports.

Russia has also backed India on important matters including the Kashmir dispute with China and Pakistan.

“White House pressure to curb purchases of crude oil from Russia have fallen on deaf ears in Delhi,” said Kapadia. “The real question will be how the US and Europe respond to India should they extend an olive branch to Russia by providing them an outlet for their oil.”

India, on the other hand, has adopted a defiant tone. “Countries with self-sufficiency in oil or those who import from Russia cannot credibly propose limited trading,” a government official told Reuters two weeks ago.

“If Western countries were to pivot India’s focus to consider how supporting Russia might embolden China’s geopolitical influence in the region, things could shift,” Kapadia added.

Analysts predict that China, the world’s largest oil importer, will also opt for Russian oil at a lower price.

According to the International Energy Agency, China is already the world’s largest single customer of Russian oil, purchasing an average of 1.6 million barrels per day in 2021.

“China is still importing Russian oil, but would likely increase its purchases if it can pay in yuan and at discounts. Basically, Russia is pressured because it is having some difficulty selling its oil,” Wald told CNBC in an email.

If they can buy Russian oil at a discounted price, I don’t see what’s stopping China from buying a lot of Russian oil.

“China really would prefer much cheaper oil … prices are way too high even in the $90 range that’s too high for China,” she added. “If they can buy Russian oil at a discount, and some of these discounts are pretty significant — $30 off the benchmark, then I really don’t see what would be stopping China from purchasing a lot of Russian oil.”

Because of Iran’s nuclear programme, a number of nations slapped sanctions on its oil, beginning with the United States and the European Union in 2011, but that didn’t stop China from buying oil from Iran through “all sorts of clandestine channels,” she added.

“So I don’t think they’re really bothered by insurance issues and the like,” said Wald, referring to insurers hiking their premiums on shipments in the region after the Russia-Ukraine war started, amid soaring risks of attacks on ships and ports.

She predicted that an increase in China’s imports would have an impact on oil prices.

“I would not be surprised if we do see more Russian oil shifting to China and then potentially other suppliers like Kuwait, UAE, even some Saudi oil shifting away, but the fact that that China will be able to get a good discount, I think will impact prices globally,” she said.

China’s purchases of Russian crude increased somewhat this year, but analysts say it has little to do with the conflict.

“China’s flows to Russia are a bit firmer than last year’s pace, but this has more to do with China’s appetite for ESPO crude from Eastern Russian ports — it doesn’t relate to Russian crude being diverted away from Europe,” Kpler’s Smith said. ESPO crude refers to Russian oil exports to Asia-Pacific markets, and is said to be popular with independent Chinese oil refineries.

“We are yet to see a change in these flows but expect it to emerge,” Smith added.

(Adapted from CNBC.com)



Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability

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