After lower sales in August, Russia ups discount on crude sale to India

Higher discounts on Russian oil this month may help Indian refiners reduce crude sourcing costs and trim fuel marketing losses even as Brent crude crosses $95/barrel, weakening the country's finances

Russia has increased its discounts on crude oil sales to Indian refiners by 25–50 per cent for the month of September. This move comes after pushbacks by Indian refiners threatened to erode Russia’s market share of over 42 per cent in India’s crude imports, according to industry officials.

The availability of cheaper Russian oil has led to a rebound in Indian purchases this month, after purchases in August dropped to the lowest level since January.

The discounts on the Russian benchmark Urals, a sour, high-sulphur grade similar to Gulf crudes sourced by Indian oil companies, had dropped to as low as $3–4 per barrel last month. However, they have since widened to $5–6 per barrel this month, as reported by government officials and an official from a Mumbai-based refiner involved in negotiations with Russian exporters.

During talks in mid-August for late September and October deliveries, Indian buyers resisted efforts by oil traders to cut discounts on benchmark Russian Urals grade sales, forcing traders to increase the discounts.

An industry official mentioned that Indian refiners find Urals competitive only when discounts are wider than $5 per barrel. This is because they need to import expensive light and sweet grades to blend with Urals for processing in their refineries. Additionally, making payments for Russian oil remains a challenge, with most payments now being made in United Arab Emirates dirhams. A discount of less than $5 per barrel makes Gulf crudes more competitive.

Rosneft, the largest exporter of Russian oil to India, accounted for 42 per cent of supplies shipped from Russia to India this year, according to Kpler. However, the company did not respond to Business Standard regarding whether it had increased discounts for Indian refiners. Most of the Russian oil shipments are routed via intermediaries.
 

Higher discounts are expected to benefit both New Delhi and Indian oil companies, especially in the face of surging global crude prices.

JPMorgan has warned that Brent crude prices could soar to as high as $150 per barrel by 2026 from the current $93 per barrel. The US bank anticipates Brent prices to be in the range of $90-110 per barrel in 2024 and between $100 and $120 per barrel in 2025, with a supply deficit of 1.1 million barrels per day in 2025, expanding to 7.1 million barrels per day in 2030.

Indian purchases of Russian oil may rise to approximately 1.83 million barrels per day this month, compared to 1.55 million barrels per day in August when discounts were at their lowest this year. This data is based on information from the Paris-based commodity intelligence agency Kpler and refinery industry officials.

Russia’s share of the Indian crude imports market was over 43 per cent in July but dropped to 35 per cent in August after discounts decreased.

The increase in Russian oil imports coincides with European benchmark Brent reaching over $95 per barrel this month, the highest level in 10 months. That is a sticker shock for India: crude prices have risen by approximately $20 per barrel since early July. Let us analyse the impact of rising crude oil prices on India’s oil import costs.

Let’s analyse the impact of rising crude oil prices on India’s oil import costs.

For instance, if annual crude imports continue to average at last month’s levels of around 4.4 million barrels per day, India could end up paying an additional $90 million per day for its crude purchases compared to early July levels. This calculation is based on Indian Customs data. On an annualised basis, India could spend an additional $32 billion on oil imports at current rates.

Higher discounts on Russian oil help to reduce the costs incurred by India for imported crude. Even a difference of a few cents per barrel is sufficient for Indian refiners to realise value from their purchases, as mentioned by an industry official.

A Mumbai-based refiner also pointed out that an increase in discounts of $1 per barrel leads to savings of several million dollars. This year, India may have saved between $3.7 billion and $4 billion from Russian oil purchases, which has helped reduce marketing losses for Indian state-run oil companies, led by IndianOil. These firms had frozen pump prices in May 2022.

According to Indian Customs data, India paid $69.8 per barrel for Russian crude in calendar year 2023, compared to $75 per barrel for Iraqi oil and $85 per barrel for Saudi crude on a landed basis.

In early 2023, Russian exporters used to offer as much as $10–13 per barrel after the Group of Seven nations introduced a $60 per barrel price cap on sales of Russian oil. 

This meant that western shipping and insurance services were unavailable for Russian crude supplied above the price ceiling on a free-on-board basis or loading basis.