The latest US sanctions on Russia do not only pose a threat to India’s crude oil supply but may result in higher cost of the landed crude oil for Indian refiners as they diversify their crude sourcing, likely at a premium to the landed price of Russian crude arriving into India, analysts and industry experts say. As much as 14% of India’s import of Russian crude is likely to be affected owing to the new sanctions. Additionally, analysts believe that tightening fleet capacity is also likely to increase freight costs
“A reduction of crude volume from Russia would mean the need for replacement barrels from other regions, including the Middle East, Africa and US. The replacement is not going to be cheap though for Indian refiners,” Pulkit Agarwal, Head of India Content (cross commodities) S&P Global Commodity Insights said. He noted that a replacement of crude supplies from any other region would come at a premium to the landed price of Russian crude, thus making it expensive for the country’s refiners.
“Platts assessed price of Urals Crude DAP west coast India is at a discount of more than $3 per barrel to Dated Brent, but a replacement crude from any of the region, depending on its grade and origin, would come at quite a premium to the landed price of Russian crude arriving into India,” he said.
The US on Friday imposed sanctions on Russian oil producers Gazprom Neft and Surgutneftegaz along with 183 other vessels that have shipped Russian oil in order to curb Russia’s revenue used to fund its war with Ukraine. Post the move, India is expected to seek alternate supplies of crude oil, diverting its focus towards the Middle East, the US, and Africa.
Xavier Tang, market analyst at Vortexa highlighted that this round of shipping sanctions marks the largest round of individual vessel-designations related to Russian trade. “Individual vessel sanctions by the US have been very effective in limiting further employment in Russian trade. Because of this track-record of effectiveness and the huge amount of tonnage named, we think these may have a big impact,” he said.
“What is most likely is that Russian crude exports will face serious logistical difficulty due to the lack of available tonnage, which will force the price of Russian crude below the price cap. At this point, Western operators would be able to get involved to lift Russian crude. We have previously observed a very low-entry barrier for this to happen. In recent instances, Western operators immediately returned to lifting when Urals briefly dipped under the price cap,” Tang said.
Given that global VLCC (very large crude carrier) freight rates spiked over the past few days, oil sourcing from other countries including the Middle East and the US would further increase freight costs for Indian refiners, analysts say.
In December, India imported around 620,000 barrels per day of crude oil carried on tankers listed on the latest US sanctions, representing between 13~14% of India crude oil imports, as per data provided by Vortexa. While Indian refiners may be forced to seek alternative sources for crude oil supplies, the industry is optimistic of Russia working its way around the latest US sanctions and finding a way to get its oil into the market. A senior government official on Monday said that the country does not expect any disruption to Russian oil supply in the next two months given that US sanctioned tankers are allowed to discharge crude until March.
“Because there is a buying period so cargoes which are already in transit will come to us. So you will not see an immediate disruption. In the next two months, we do not anticipate a major problem because ships that are already in transit will come through,” the official said, adding that the period of 6-8 weeks is a window for producers as well as buyers to work out alternate arrangements.
“We need to see how much volumes actually get impacted given the Russian trade has been quite resilient in the past and have found new ways for the oil to keep flowing,” Agarwal said.
Global crude oil prices that reached their highest level since August at $81 per barrel on Monday following the concerns over supply disruption have come down and were hovering at $80 per barrel on Tuesday.
Post the outbreak of conflict in Ukraine, Russia has emerged as the top supplier of crude oil to India on the back of healthy discounts it offered. India’s import of Russian crude oil declined by 13.2% to 1.39 million barrels per day in December against 1.61 million barrels per day in November, data from Vortexa showed. However, Russia remained the largest crude supplier to the country in December accounting for 31% of India’s total crude oil imports.
For the first twelve days of January, India has imported 1.7 million barrels per day of crude from Russia, higher than what the country imported last month.
India imports almost 85% of its crude oil requirements. The country’s oil demand growth rate is now expected to surpass China’s, making it one of the fastest-growing consumption centres, prompting the country’s refiners to accelerate expansion plans and widen crude diversification, as per S&P Global Commodity Insights.
As per S&P’s projections, India is forecast to deliver a relatively faster growth in oil demand of 3.2% in 2025, compared with China’s 1.7%.
Following the price ceilings imposed by the US in 2022 on sourcing of Russian oil, tankers have been transporting it to India and China, as supplies to Europe were disrupted.