How will India cope with Urals breaching the EU-denominated price cap?

Urals crude has passed the trading price cap imposed by the G7 but supplies to India may sail through largely unscathed. Here's why

The reports of my death are greatly exaggerated, said the text of a cable sent by American writer Mark Twain from London to the press in the United States after his obituary had been mistakenly published. One can say the same about the role of Russian crude in India’s slate, after Urals, a lynchpin of India’s oil imports, rose above the price cap set by the G7 countries this month prompting Indian government officials to presage a decline in the crude’s fortunes. Indian officials also harbour hopes of replacing discounted Russian oil with supplies from our traditional West Asian suppliers such as Iraq and UAE, on similar terms or extended credit periods.

But a diminishing role for Russian crude in India’s crude oil basket simply on the basis of a volatile commodity such as crude oil flirting with the $60 a barrel price cap may be overstated, Indian refining officials said.

Also Read: Russia oil discount to India shrinks to $4, delivery charges remain opaque

Before we examine the implications of the G7-imposed price cap on Moscow in December, let us trace the ascendancy of Russian oil.

In February 2022, when Moscow marched into Ukraine, Russia shipped zero barrels of crude oil to India. Volumes rose to 46 million barrels this month (as of July 23), capturing 45 per cent of the Indian market, according to data from Paris-based commodity intelligence provider Kpler. Urals, a high sulphur, sour grade similar to Gulf crudes traditionally supplied to Indian refineries, accounted for 27 per cent of India’s total crude purchases in calendar 2023, ship tracking data show.

Vandana Hari, a Singapore-based energy expert and founder of Vanda Insights, described this rising share as “unprecedented”. This is the first time that one country has accounted for over 40 per cent of India’s imports, climbing at a record pace of just 18 months, she said. This surge was not possible if Indian refiners had not benefitted from the purchases, she said.

No further increases in Russian shipments are possible because of technical limitations for Indian refineries to process more Urals, Hari went on to explain. But shipments may slow because Russia is voluntarily cutting another 500,000 barrels a day (b/d) of output next month, in addition to 500,000 b/d already committed, leaving less oil for China and India. Most of the cuts will come out of cheaper Urals while shipments of premium, light grades will be steady.

But Russian crude could continue playing a significant role in India’s trade basket, said Narendra Taneja, a leading energy expert. Russia depends heavily on China and India for its oil sales since Western sanctions, and Russian exporters will do everything possible to maintain this as long as sanctions persist, he said.

Also Read: India may prefer Middle East crude as Russian oil becomes costly: Report

Indian officials claim that discounts on Russian crude have crashed to $3 a barrel after Urals turned expensive this month, potentially hurting purchases. Market sources said that surging demand for Urals has shrunk discounts from $8-$10 a barrel — on a landed basis off European benchmark Brent — to around $5-$6 a barrel. But given India’s huge oil purchases, even a difference of a few cents to a barrel is adequate for refiners, a refining official said.

Moreover, Russian oil, notably Urals, has helped Indian state refiners stay above water since early 2022, after pressure from Delhi forced them to keep pump prices of petrol and diesel flat for over a year, incurring billions of dollars in losses in the process. Discounted Urals have helped trim the loss, an industry official said.

Urals will remain competitive in Asian markets — as the fact that their discounts have been reduced suggests — and Russia does not have to offer very high discounts, as it did when it had to shift markets away from Europe, said Tilak Doshi, a London-based energy expert, previously with Saudi Aramco and Unocal among others.

So how will India cope with Urals breaching the EU-denominated price cap? First, the problems with paying for expensive Urals may be overstated. India has bought premium Russian, low sulphur grades for several months now and successfully made payments. Non-Urals crudes, comprising premium, light, sweet grades typically trade above the price cap, and accounted for 32 per cent of India’s purchases in 2023, payments for which were processed via Indian and UAE banks.

“There were some hiccups initially, but we worked around it,” said a state refining official. The official said that most payments for Russian oil were now made in dirhams. Some payments are in roubles, and some odd cargoes cleared in yuan, the official added. The official said that sanctions only prohibit using Western insurance and shipping services above the price cap, but do not bar payments to Russian exporters. State-run banks like SBI, PNB and BoB have been skittish, fearing Washington, but large private banks have come forward to facilitate payments.

Some refiners may have also taken to splitting invoices, an industry official said. This means an invoice of Russian oil, costing say $64 a barrel, is split in two parts. The first invoice, priced below the cap, is paid immediately to the Russian exporter on presentation of loading documents, and the remaining amount in the second invoice is bundled together with other such invoices and paid separately, out of Dubai, Singapore or Hong Kong, a Singapore-based veteran commodity trader explained.

India’s options for cheap oil are limited. Since March, OPEC+ nations have cut over 3 million b/d of output. Brent has firmed up to the current $79-80 a barrel but the outlook for crude prices remains bearish with questions over the pace of China’s economic growth, Doshi said.

UAE and Iraq need to shore up their revenues from oil exports amid lower shipments and a less-than-expected increase in oil prices, Hari added. Moreover, their prices are typically in line with Saudi selling prices, which have been at a premium for Asian buyers. So there is little possibility of West Asian suppliers offering outright discounts to India, Hari said.

In May, UAE and Saudi Arabian oil cost $14-15 a barrel more than Russian oil on a delivered basis, according to customs data. Iraqi crude was $5 a barrel higher, according to customs data. Given the wide gap in prices, Russian oil will remain the biggest bet for Indian refiners as they find more innovative ways and dark traders to import and pay for the oil. Supplies will be hurt only if the Russians offer lower volumes.