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India Gorges on Cheap Russian Barrels

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Russia had merely been a blip on India's oil import radar until February. But the deep discounts Moscow has offered for its crude since the start of the Ukraine war have rapidly made Russia the second-biggest supplier to India. Volumes are nearing 1 million barrels per day, accounting for over a fifth of India's total imports. And experts say there is room for more, even if buying additional Russian oil risks further upsetting the West, which has been trying to constrain revenue flows to Moscow. In June, Russia supplied 985,000 b/d to India, edging out Saudi Arabia as its second-largest supplier, according to Kpler data. The kingdom’s supplies declined to 686,000 b/d while Iraq remained the top suppler at 1.01 million b/d. Import figures vary due to different assumptions about cargoes, but they all suggest a huge surge in Russian oil into India. Vortexa estimates they averaged 980,000 b/d last month, behind Iraq at 1.05 million b/d but ahead of Saudi Arabia's 760,000 b/d. India's Russian oil imports averaged 655,000 b/d in May, the latest month of official data from the federal commerce ministry. That compares to an average of just 50,000 b/d in 2021. Kpler analyst Viktor Katona estimates July shipments will remain between 950,000-1 million b/d, while Vortexa’s Serena Huang pegs imports in the first half of July at a record 1.4 million b/d, excluding CPC blend. Katona expects volumes to remain between 900,000 b/d and 1 million b/d for the second half of 2022.

The double-digit discounts on medium, sour Urals and Far Eastern sweet crude East Siberia-Pacific Ocean crude (Espo) have helped Indian refiners replace staple Mideast grades like Basrah and Arab Light. The discounts have helped boost refining margins and cut losses on selling products at low, regulated prices in the domestic market. Cheaper Russian barrels have also reduced demand for dollars for India, which meets 85% of its oil needs via imports, easing pressure on the rupee, which is trading at a record low against the greenback. Indian refiners have gained confidence in processing Urals, which they blend with other grades. India has been importing Urals through the Baltic ports of Primorsk and Ust-Luga and the Black Sea port Novorossiysk. Vortexa says it takes 13 days for a Suezmax tanker to travel from Novorossiysk to India's west coast, which means the Black Sea Urals represent relatively prompt supply — faster than delivery of crude from West Africa, for instance. Urals shipped from the Baltic are cheaper but can take up to 40 days for tankers to reach Indian shores. India and Russia have been working on opening a shipping corridor from Vladivostok to Chennai, which will cut down shipping times to 19 days compared to the existing route from St. Petersburg to Chennai, which takes twice as long. Indian refiners have been getting a $15-$17 per barrel effective discount to Brent on Urals. Energy Intelligence believes Moscow could offer even steeper discounts in coming months to maintain sales, although this could irritate Opec-plus allies and prove hard to sustain if global oil prices fall on demand weakness. Refiners are now loading more Espo, which Kpler’s Katona says is the most cost-efficient way of boosting diesel yields. Vortexa’s Huang says the trade could evolve into structural flow as Russia looks for markets other than China for its crude exports in the face of an impending EU ban.

India will continue to be lifeline for Russia as long as steep discounts remain and sanctions do not upset supply chains. But there are limits to how much Russian oil that India can take. Due to term contracts with other supplies, this limit could be near 1.5 million b/d, Kpler estimates. Urals and Espo have already squeezed out a sizeable chunk of India’s spot purchases, with remaining volumes coming from Mexico, Angola, Nigeria or the US — together totaling some 500,000 b/d. The G7's effort to implement a price cap on Russian oil could further stoke India’s appetite for Russian barrels in this red-hot oil market. As the EU’s ban on Russian oil takes effect in coming months, some think there could be added incentive for Indian or other non-European refiners to increase purchases from Russia’s western ports, although this will depend on the availability of European-owned ships.

Topics:
Oil Demand, Oil Supply, Sanctions, Military Conflict, Crude Oil, Ukraine Crisis
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