Russia’s flagship crude tops G7 price cap, but impact on supplies to India may be muted

Russia began offering deep discounts on its oil exports as major Western economies started weaning themselves off Moscow’s crude. Indian refiners lapped up the opportunity, snapping up the discounted barrels in huge quantities, resulting in Russia emerging as India’s largest source of crude, displacing traditional heavyweights like Iraq and Saudi Arabia in the process. From a share of less than 2 per cent in India’s oil imports prior to the war in Ukraine, Russian crude now accounts for over 40 per cent of Delhi’s oil import pie. And this surge in Russian oil supplies to India has been mainly powered by the medium sour Urals crude, which accounts for over two-thirds of India’s imports of Russian oil, as per data from leading energy market intelligence firms Kpler and Vortexa.

Till early this week, Urals traded below the price cap, which meant that cargoes could access Western services and insurance and Indian refiners could pay for such cargoes without any real risk of inviting Western sanctions. Now with Urals breaching the price cap as global oil prices inch up due to production cuts by major suppliers and a dip in exports from Russia, that equation could change. Even as officials at Indian refiners are tight-lipped about the evolving situation, industry watchers do not see a major shift in the Russian oil flows to India, at least for the time being.

Vortexa’s Head of Asia Pacific Analysis Serena Huang expects Indian refiners and Russian oil exporters like Rosneft to manage the oil trade and any complication that the higher price of Urals might lead to. “Over the past six months, it has become evident that Russia and India are determined to overcome any obstacles in order to maintain the Russian oil trade and establish a long-term contract for mutual benefit,” Huang said.

According to Kpler’s Lead Crude Analyst Viktor Katona, the fact that a large chunk of Russian crude supplied to India is by Russian vessels and “grey fleet”, or shadow fleet tankers, which do not have much reliance on Western shipping and insurance services, means that it would largely be business as usual as far as supplies are concerned. The so-called shadow fleet has old oil tankers with unclear ownership structures and purported links to Moscow. Since the war in Ukraine broke out in February 2022, the number of such tankers has grown rapidly. Mumbai-based Gatik Ship Management is seen as a major shadow fleet operator involved in Russia’s oil trade.

“Price cap only really matters for shipping and insurance. In the case of Russia-to-India flows, both are non-Western with Russia’s own fleet overwhelmingly focussed on India and a large chunk of the grey fleet working along the same lines,” Katona said. It is not clear where these tankers are availing insurance and other maritime services from.

Paying for Russian oil at prices above the G7 cap is, at least theoretically, a challenge for Indian refiners, given that Indian banks are reportedly reluctant to get involved in such payment settlements. “Due to heightened scrutiny from India’s domestic banks, executing trades above the price cap has become progressively challenging,” Huang noted. With the price cap breach, Indian banks are now expected to step up the scrutiny of Russian oil purchases and insistence on proof that the cargoes are priced below the price ceiling is expected to rise.

It is also worth noting that some Russian oil shipments may still be availing Western insurance services. But thanks to the opacity in discounts offered by Russia and the actual price of oil that Indian refiners are charged, these hurdles may not be not difficult to cross.

“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.

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,” Katona said, adding that oil payments in other currencies could pick up if Indian refiners and banks become loath to settling trades in dollars for fear of sanctions.

“In case some Indian buyers become wary of transactional risks, the most likely change this is going to bring about is a change in currency. Up until now, most payments were still made in dollars. It could be switched to UAE dirhams for instance,” Katona said. There have been reports that Indian refiners have used dirhams to pay for some Russian oil cargoes over the past few months. A recent report by Reuters said that Indian refiners have settled some payments even in Chinese yuan.

Going beyond near-term supplies and the nuts and bolts of Indian refiners’ payment for Russian crude, there is likelihood of Russian barrels becoming less attractive for Indian refiners due to narrowing price differential between Moscow’s oil and other similar grades of crude.

“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.

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. But it might not yield any significant result in their favour.

“I don’t see the Russians offering higher discounts…they are pretty much using their 500,000 bpd (barrels per day) export cut (as part of coordinated production cuts by major oil producers) to argue the discounts should actually go the other way around, that is, become smaller. And arguably supply availability has a bigger say in price discovery than the oil price cap. But I’m pretty sure Indian refiners will try to argue that point,” Katona said.