The dramatic transformation of India’s oil trade with Russia

The dramatic transformation of India’s oil trade with Russia

Context- Before the war, Russia was a marginal player in India’s oil trade, which was dominated by West Asian suppliers like Iraq, Saudi Arabia, and the United Arab Emirates (UAE). In a little more than a year, the discounts ensured that Russia became the biggest source of crude for India.

The Russian discounts seem to have been eroded considerably in recent weeks. The rise in the price of key Russian grade Urals might create payment problems for Indian refiners — and test the strength of the energy trade relationship.

Even so, this is the story of the biggest shift in India’s oil trade in recent history.

CHART 1: Growth in Russian oil imports

(Credits- Indian Express)

  • Data from the Directorate General of Commercial Intelligence and Statistics (DGCI&S) show India’s oil imports from Russia have grown more than 10 times since April 2022. The DGCI&S releases trade data with a lag, and data until May are so far available.
  • The growth has been steady especially since December 2022, after the G7 imposed a $60-per-barrel price cap on seaborne Russian crude early that month.

CHART 2: Russia gained, others lost out

(Credits- Indian Express)

  • Russia’s market share surged to 24.2% in the 14-month period, up from a measly 2% in FY22. Most of the other major suppliers saw their market shares fall. Iraq, Nigeria, and the US saw the most notable declines.

(Credits- Indian Express)

  • The cumulative market share of members of the Organization of the Petroleum Exporting Countries (OPEC), the major oil producers’ group that dominated India’s oil import basket, declined dramatically as India’s Russian oil imports graph rose sharply.
  • OPEC’s share in India’s oil imports fell by almost half — from 75.3% in May 2022 to 40.3% in May 2023. Among the major suppliers to India, Iraq, Saudi Arabia, the UAE, Kuwait, Nigeria, and Angola are members of the OPEC cartel.

CHART 4: Mystery of the actual discount

(Credits- Indian Express)

  • While Indian refiners have been buying cheap from Russia, the actual discounts on the oil remain shrouded in mystery, thanks to the opaque pricing of Russian oil cargoes. Indian refiners buy on a ‘delivered’ basis, which means that the price of the cargoes includes the cost of freight and insurance, apart from the cost of the oil itself.
  • The best available marker for discounts is a comparison between the average landed price of Russian crude and the average price of oil imported from all other suppliers. Western sanctions are said to have raised freight and insurance costs for Russian oil considerably.
  • Trade data suggest Indian refiners saved at least $7.17 billion in foreign exchange in the 14 months ended May 2023 by ramping up buying of discounted Russian oil.
  • India’s oil imports from April 2022 to May 2023 were $186.45 billion; had Indian refiners paid for Russian oil the average price they paid for crude from all other suppliers put together, the oil import bill would have been $193.62 billion.
  • The differential in the price of Russian crude vis-à-vis other top suppliers shows Russian oil was delivered to India at a significant discount to oil from Saudi Arabia and UAE for most months.
  • The discount on Iraqi oil, on the other hand, was the lowest in most months. In fact, the average landed price of Iraqi oil was lower than that of Russian oil in a couple of months, which suggests that Iraq tried to compete with discounted Russian barrels by giving concessions. Amid the recent contraction in Russian discounts, Indian public sector refiners are in talks with Iraq for more purchases on friendlier payment terms.

Conclusion- In a little more than a year since the war in Ukraine began, deep discounts offered by Russia have made it the biggest source of crude for India. This is the story of the biggest shift in India’s oil trade in recent history.

Syllabus- GS-3; Energy

Source- Indian Express