Indian Refiners Continue To Opt For Russian Crude Over Middle Eastern Alternatives Despite Narrowing Discounts: Report

Indian buyers, who have been major consumers of cheap Urals crude since the invasion of Ukraine, have no intention of turning away from Moscow.

Despite the discount to global benchmarks narrowing, the Indian buyers reportedly argue that Russian barrels are still one of the most affordable options available.

India's consumption of Russian crude has significantly increased over the past year, making the Moscow the leading supplier of crude to New Delhi. This has resulted in Saudi Arabia and Iraq losing their top spots.

The driving force behind this surge has been the attractive pricing of Russian crude, as well as Prime Minister Narendra Modi's efforts to control energy inflation.

However, the dynamics are changing, as the gap between Russian crude and the Dubai benchmark has reduced from around $20 earlier this year to approximately $8 now.

According to pricing data from Argus Media Ltd., Urals crude delivered to the west coast of India was priced at above $81 a barrel on 4 August, compared to around $68 a month earlier.

Despite the narrowing discount, officials at four major Indian refiners have confirmed that they will continue to purchase Russia's flagship Urals blend, Bloomberg reported.

They argue that similar-quality barrels from the Middle East are still significantly more expensive.

That means India is purchasing more Urals barrels than many had expected.

According to Samiran Chakraborty, chief economist for India at Citigroup, there was a perception that India had limited capacity to refine medium sour grade of Russian crude, which would create a natural ceiling on Russian imports.

However, it has now been clearly demonstrated that such a bottleneck does not exist. This implies that Indian refiners can continue importing Russian oil as long as the discounts outweigh the higher logistics cost of imports, Chakraborty added.

Unless the current Russia-Ukraine conflict escalates and disrupts deliveries, the geopolitical situation is unlikely to change the current scenario.

Refinery executives have mostly disregarded a drone attack on a Russian-flagged oil tanker.

South Asian buyers have reportedly been made aware of the supply risks. However, they are also protected from the higher cost of freight and insurance because the structure of India's oil trade means that sellers of Russian crude cover those expenses.

Increased trading difficulties and scrutiny have not deterred Indian processors from continuing to purchase Urals crude oil, even as it surpassed the $60-a-barrel limit imposed by Western nations.

Refinery officials have reportedly stated that as long as they can book vessels and settle payments, they will continue to buy Urals crude.

The main driving factor behind the demand for Urals crude in India is its price.

In June, the average cost of Russian crude, including freight charges, landing on Indian shores was $68.17 per barrel, the lowest since Russia's invasion of Ukraine. In comparison, shipments from Saudi Arabia amounted to $81.78 per barrel.

Global oil markets are currently experiencing tight supply, leading to oil futures trading at a nine-month high.

Saudi Arabia and Russia have extended their voluntary production cuts into September, creating a demand for medium-sour crude oil similar to the Urals grade. This increased demand coincides with a strong physical market in Asia.

Solid returns from refining crude oil are helping to offset the increase in crude costs, according to officials.

Asian refining margins have more than tripled since early July.

Although Russian crude import volumes have decreased from their record highs in recent months, this is largely due to seasonal impacts such as the monsoon, which typically leads to a decrease in demand. However, experts predict that a rebound in import volumes is on the horizon.

Result: Solid returns from refining crude oil are helping to offset the increase in crude costs, according to officials. Asian refining margins have more than tripled since early July, indicating a positive trend in the industry.

Although Russian crude import volumes have decreased from their record highs in recent months, this is largely due to seasonal impacts such as the monsoon, which typically leads to a decrease in demand. However, experts predict that a rebound in import volumes is on the horizon.

Chinese buyers face a dilemma when it comes to choosing between Iranian and Russian oil, but for Indian refiners, Russian crude is the most cost-effective option. As a result, there is expected to be a significant increase in Russian cargoes being delivered to India starting from October.