India’s public sector refiners are in talks with their traditional West Asian suppliers of crude oil, particularly Iraq, to increase purchases amid a significant decline in discounts on Russian crude and likelihood of payment-related problems as Moscow’s flagship Urals crude trades above the G7 price cap of $60 per barrel, as per a senior government official.
The discount on Russian crude has contracted drastically in recent weeks and public sector refiners are not looking to buy from Russia if they are charged more than the G7 price cap, said the official, who did not wish to be identified. India has asked Iraq to consider better payment terms, like increasing the credit period to 90 days from the current 60, in lieu of higher offtake of Iraqi oil by Indian public sector refiners Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL).
“It is the cleaner deal,” the official said, referring to buying oil from India’s traditional suppliers like Iraq. “Iraq has been supportive and a good trade partner. They have given us good discounts in the past as well,” the official added, but did not elaborate on the discounts and additional volumes under consideration.
Prior to the war in Ukraine, Iraq was India’s largest supplier of crude oil. Russia, which used to be a marginal player, emerged as India’s largest source of crude over the past 15 months, thanks to deep discounts offered by Moscow to Indian refiners. Russia currently accounts for over 40 per cent of India’s oil imports by volume.
The official did not quantify the erosion in discount on Russian oil. According to some estimates, the discounts (on delivered price basis) have fallen to under $4 per barrel in recent weeks from last year’s peak levels of over $13 per barrel. Meanwhile, Russia’s flagship Urals crude breached the G7 price cap of $60 per barrel this week for the first time since the ceiling on seaborne Russian crude took effect from early December. Urals makes up for over two-thirds of India’s Russian oil imports and the breach in price cap comes as global oil prices inch up due to production cuts by major suppliers and a dip in exports from Russia.
The official said that so far, IOC, BPCL, and HPCL have not bought any cargo of Russian oil priced above the $60-per-barrel ceiling, and they don’t intend to do it in future as well. The price limit forbids transportation of Russian oil on Western ships and use of Western insurance services if the cargoes are priced over $60 per barrel. Payments for oil cargoes in breach of the price cap using dollars or euros are also problematic as such transactions could lead to secondary sanctions. Therefore, Indian refiners and banks want to steer clear of such payments.
According to industry experts and analysts, crossing the payment hurdle is not going to be too difficult if India and Russia work together. However, a sustained closing of the gap between prices of Urals and other key international crude oil grades and benchmarks could take the sheen off Russian oil for Indian refiners going ahead.
“Yes, there is a risk of US sanctions if Indian refiners buy above the price cap, but maybe they could find ways to get around it, as the market is quite opaque and they buy (Russian oil) on a delivered basis (which included cost of freight and insurance),” said Vandana Hari, Founder and Chief Executive Officer of Singapore-based energy market intelligence firm Vanda Insights. More than the payments issue, Hari sees the erosion in discount on Russian oil and its narrowing gap with other comparable grades as having the more detrimental effect on India-Russia oil trade.
“The most straightforward consequence of Russian crude prices rising and closing their gap with Brent (a global benchmark) is that Russian barrels lose their advantage over comparable grades for Indian refiners…Refiners will buy the most cost-competitive grade available, period,” Hari said.
The price cap is applicable on the price of oil excluding the cost of insurance and freight. As Indian refiners’ Russian oil purchases are all on delivered basis, some tweaks in the freight and insurance overheads should be enough to show that the cargoes are compliant with the price cap.
“The breaching of the price threshold happened in the assessments of price reporting agencies. Companies (suppliers and refiners) can still build up a trading chain that would have the first transaction in the port of loading below $60 per barrel,” said Viktor Katona, Lead Crude Analyst at Kpler. He added that oil payments in other currencies could pick up if Indian refiners and banks become loath to settle trades in dollars for fear of sanctions.
Analysts do expect Indian refiners to use the rise in price of Russian oil and the G7 price cap as leverage to negotiate better discounts with Moscow. Public sector refiners as well as the government have so far been tight-lipped on whether they are pushing Russia to deepen the discounts.
