Amid renewed West Asia conflict, discounts on Russian oil for Indian refiners vanish

The sanctions waiver, which was issued by the US to keep the global oil market well-supplied, lapsed on June 17, the same day on which the US-Iran MoU was inked.

“Russian oil was never sanctioned, only some vessels, service providers, and certain other entities were sanctioned (by the US). But if you are purchasing from other entities, you can very well continue to buy…We are buying completely from the non-sanctioned entities,” Gupta told The Indian Express Thursday. He added that the non-sanctioned sources of Russian oil supplies were more than adequate to meet India’s demand and supplies till August-end were already tied up, with

“Volumes are available, only the price fluctuates. At times it (Russian oil) even commands a premium, instead of (the usual) discount, but enough volumes are available. In fact, because Russian refineries got impacted (due to Ukrainian attacks), surplus Russian oil volume was available for exports,” he said.

Ever since the Russia-Ukraine broke out in February 2022, Russian crude usually traded at a discount as numerous countries, predominantly in the West, shunned Moscow’s oil. Highly import-dependent Indian refiners, however, were quick to step up their purchases of Russia’s discounted barrels, catapulting Moscow to the position of New Delhi top source of crude within a few months. Before the Ukraine war, Russia was a peripheral oil supplier to India, with less than 2% share in India’s oil import basket.

But amid the West Asia war, as vessel movements through the Strait of Hormuz — which usually accounted for a fifth go global oil flows — effectively came to a halt, refiners in India and even other parts of the world scrambled for oil from alternative sources, leading to discount erosion and even premium on Russian oil.

After the June 17 US-Iran MoU, energy flows through the strait started recovering, with hope in the market that supplies through the chokepoint would normalise steadily. The optimism led to a fall in oil prices; discounts on Russian oil at Indian ports had also widened to over $10 per barrel to benchmark Brent crude in early July, as per industry estimates. However, the recovery in energy flows from West Asia lasted about three weeks, after which attacks on ships in the region resumed and taker traffic crashed again.

As per ship tracking data , only around 10 vessels crossed the Strait of Hormuz on July 21. Since mid-June, vessel movements through the strait had risen meaningfully, even crossing 90 on June 24, with the average being between 40 and 50 on most days in the three weeks that followed the MoU, industry data shows. But these were still lower than the pre-war levels of up to 140 daily transits.

Amid the West Asia crisis, as oil flows from the Gulf dried up, Russian crude became India’s strongest energy security hedge. As per Kpler data, India’s Russian oil imports rose to around 2.6 million barrels per day (bpd) in June, accounting for over half of New Delhi’s total crude imports. July arrivals are also tracking at healthy levels and could match or even exceed June’s volumes, as per estimates. India depends on imports to meet over 88% of its crude oil needs, and over 40% of that was met by oil that came via the Strait of Hormuz.

In the months preceding the West Asia war, oil imports from Russia had reduced notably as the US imposed sanctions on Russian oil majors Rosneft and Lukoil, and amid trade pact negotiations with New Delhi and Washington. The US made a meaningful reduction in Russian oil imports a prerequisite for scrapping its 25% additional penal tariff on India. But as supplies from West Asia dwindled due to the effective closure of the Strait of Hormuz, Russian oil came to India’s aid and volumes surged to historic highs.