Limited discounts on Russian oil for Indian refiners

Indian refiners are getting lower discounts on Russian oil compared to European counterparts as a result of the EU’s March directive banning European traders from supplying non-European customers.

Since the outbreak of the war in Ukraine, Indian state and private refineries have significantly increased their intake of Russian oil, which is sold at a huge discount, relative to global benchmarks. But the average discounts Indian refiners have used on a delivery basis have been in the $10 a barrel range, much lower than what is believed to be used by refineries in Europe, oil industry executives said.

Proximity to Russia has always meant lower supply costs for Europe, but a reconfiguration of suppliers due to sanctions has increased the customers’ advantage on the continent over Indian refineries. While price rating agencies have reported a $35 a barrel discount to Brent, the global benchmark, based on Free On Board (FOB), a combination of shipping and insurance costs, which have risen sharply due to war, and higher merchant margins led to an effective $10 a barrel concession to Indian buyers, executives said, adding that fewer traders means lower bargaining power for oil customers.

Since mid-March, European traders – the big boys of the global oil trade – have been banned from signing new supply contracts with customers from outside the EU.

russian oil

“This has resulted in fewer suppliers of Russian oil to Indian or other non-European buyers and this is weighing on discounts for buyers,” said a person familiar with the matter. “At the same time, the major European traders have to sell Russian crude only to customers on the continent, resulting in bigger discounts for those customers.”

According to S&P Global Market Intelligence, crude oil of Russian origin accounted for 5% of total oil imports into India for the first time in April, down from less than 1% in the full year 2021, as refineries searched for cheaper oil amid growing demand and rising prices. Before the war in Ukraine, Indian refineries used very little Russian oil because of the higher freight.

The European Union has imposed several rounds of sanctions on Russia since the war broke out and has pledged to ban two-thirds of Russia’s oil imports by the end of the year.

The sanction package released on March 15 bans any transaction with Russian oil and gas producers such as Rosneft, Transneft and Gazprom Neft. However, the ban does not apply to “transactions strictly necessary for the purchase, importation or transportation of fossil fuels, in particular coal, oil and natural gas, … from or through Russia to the Union.”

This exemption has meant that independent European traders such as Glencore, Gunvor, Vitol and the trading units of European oil majors can only supply Russian oil to the buyers on the continent, not those outside it, such as Indian refineries, said people familiar with the matter.

Many major traders are either based in European Union member states or Switzerland, which is not an EU member but has adopted EU sanctions against Russia.

The EU gets 27% of its imported oil from Russia and remains its largest customer despite the war and sanctions. The UK gets 8% of its oil needs from Russia.

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