MUMBAI, INDIA (TEH) – Indian public sector refineries are revisiting conversations with their historical West Asian crude oil providers, chiefly Iraq, intending to expand their acquisition volumes. This move comes in light of a substantial reduction in the concessions on Russian oil and the potential payment impediments arising as Russia’s prime Urals crude exceeds the G7’s imposed price ceiling of $60 per barrel, revealed a high-ranking government official.
Recently, the markdown on Russian crude has shrunk significantly, compelling public sector refiners to reconsider their purchases from Russia, especially when the rates breach the G7 price ceiling, stated the anonymous official. In a strategic move, India has proposed enhanced payment terms to Iraq, such as extending the credit period from 60 to 90 days. This is in exchange for increased procurement of Iraqi oil by Indian public sector refiners – Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL).
The official lauded the prospect of securing oil from conventional suppliers like Iraq as “the cleaner deal.” He further added, “Iraq has been supportive and a good trade partner. They have given us good discounts in the past as well,” although specific details about the discounts and additional volumes under discussion remained undisclosed.
In the pre-Ukraine conflict era, Iraq stood as India’s largest crude oil supplier. However, Russia managed to climb the ranks as India’s primary crude source over the past 15 months, courtesy of the deep price cuts Moscow offered to Indian refiners. At present, Russian imports constitute more than 40% of India’s oil imports by volume.
The official did not provide specific numbers about the decrease in the Russian oil discount. However, market estimates suggest that discounts have dwindled to below $4 per barrel in recent weeks, a sharp fall from the peak levels of over $13 per barrel last year. Concurrently, Russia’s Urals crude surpassed the G7 price cap of $60 per barrel this week, marking the first time since the imposition of the seaborne Russian crude price ceiling in early December. The surge in price cap arrives amidst a global rise in oil prices, attributable to production slashes by major suppliers and a decrease in exports from Russia.
Thus far, IOC, BPCL, and HPCL have refrained from purchasing any Russian oil cargo priced above the $60-per-barrel limit, with no plans to deviate from this stance in the future. The price limit restricts the transportation of Russian oil on Western vessels and the use of Western insurance services for cargoes priced over $60 per barrel. Payments for overpriced oil cargoes can invite secondary sanctions, causing Indian refiners and banks to tread cautiously around such transactions.
Sanctions to limit Russia’s oil export income,—the EU embargo & G7 oil price cap—have successfully reduced Russia’s export earnings. But the embargo has had a stronger effect than the price cap, in part because the cap is too high & enforcement is lacking.https://t.co/v7lSnoowYa
— Peterson Institute (@PIIE) July 13, 2023
Industry experts and analysts suggest that circumventing the payment obstacle should be manageable, provided India and Russia collaborate. However, a sustained closure of the price gap between Urals and other international crude oil grades could detract from Russian oil’s attractiveness for Indian refiners.
Vandana Hari, Founder and CEO of Singapore-based energy market intelligence firm Vanda Insights, said, “Yes, there is a risk of US sanctions if Indian refiners buy above the price cap, but perhaps there are ways to navigate around it…” Hari perceives the diminishing Russian oil discount and its narrowing differential with other similar grades as having a more detrimental effect on the India-Russia oil trade.
An alteration in freight and insurance overheads might suffice to demonstrate the cargoes’ compliance with the price cap, considering all of Indian refiners’ Russian oil purchases are based on delivered prices. Viktor Katona, Lead Crude Analyst at Kpler, suggests a trading chain with an initial transaction in the port of loading below $60 per barrel could bypass the price cap problem.
Analysts anticipate Indian refiners leveraging the Russian oil price increase and the G7 price cap to negotiate better discounts with Moscow. However, the public sector refiners and the government have yet to comment on whether they are pressuring Russia for deeper discounts.
