A Dynamic India is still benefiting from sanctions on oil producers Russia and Venezuela. Lower costs of crude oil help India weather changes in the global economic landscape. Further changes to Indian government policies are still pending.
EkaLore has previously looked at the import of Russian crude since early 2022. The large increase in imports has benefits of the crude refining to the Indian economy for higher exports, more fuel availability, and higher capital utilization. In this release EkaLore looks at continuing benefits as Indian buyers shift to another source of sanctioned crude oil.
The USA, EU, and others limiting prices for Russian crude have created a global crude oil market situation where money is being made from the refining and use of sanctioned crude.
In the case of Russian crude this takes the form of less costly (in dollar denominated trade) crude oil. The total delivered costs of Russian crude has created opportunities for multiple Indian refiners to produce refined fuel products, chemicals, and intermediate products valued on global markets. The continued global sanctions on Russian crude have combined with other market conditions to keep the price of crude oil down while other conflicts and market changes have happened.
The Venezuelan crude oil has been impacted by global sanctions as well. Led by the United States the sanctions on Venezuelan crude, and to Venezuelan enterprises, has substantially reduced crude oil production and global markets. Venezuelan crude, like other ‘heavy grades’ contains more sulfur and other components. These components make refining of the crude more costly. The costs are also reflected in the refineries to process the crude as additional equipment and operations are required to get the full value from refined heavy crude. The reduction in Venezuelan production (substantially going to Russia and China in prior years) also meant less availability of fuels in the Venezuelan local economy and its trading partners. Restrictions on financing Venezuelan trade, akin to the sanctions on Russia, has also limited global availability of Venezuelan crude. The resulting demand drop for Venezuelan crude in China and the USA has also depressed global demand for it.
Indian refiners, particularly Reliance, are now in a competitive position to take advantage of the isolation and availability of Venezuelan crude. Changes in USA sanctions has enabled some, previously sanctioned, crude to reach the global markets. Chinese “teapot” (smaller, spot market, refiners), operations on the USA Gulf Coast, and Indian refiners have the equipment and capacity to process volumes of Venezuelan crude. The advantage goes to India refiners, like Indian Oil, Hindustan Petroleum/Mittal, and Reliance, that can operate on the global market and have the complete logistics capability to handle heavy crude.
Reliance, prior to 2020, had been a major buyer of Venezuelan crude. The trade was one of the business case reasons for the expansion of Reliance’ refining capabilities and capacity.
The Venezuelan enterprise PDVSA had been the 2nd largest supplier to Reliance at one time. Middle Eastern suppliers had taken up most of the capacity prior to Russia emerging as a major crude source in 2022. Reliance is capable of processing Venezuelan heavy crude and returning the intermediate refined products necessary to continue the logistics and production of heavy crude. This combination has the benefit for Reliance of buying a low cost raw feed stock crude, earning money on the refining, and then profiting again on the immediate sale of the intermediates back. This virtuous circle process also eases tanker logistics and can establish a consistent ongoing trading cycle.
The unconfirmed prices for Venezuelan crude are likely similar to the delivered-prices for sanctioned Russian crude nominally limited to USD$60/barrel. Discounts from West Texas Intermediate or Brent Crude prices from USD$7.50-$8.50 per barrel, and discounts, for on-board crude, of up to USD$16 per barrel, to Brent, creates a strong advantage for Indian refiners. Production contract issues for Venezuela for LNG, and other energy products, raise the pressure for sales, thru intermediaries, for crude. New, and old, crude oil traders (like Vitol, Chinese traders, and Middle Eastern traders) can use logistics capacity, lower cost crudes, and available refining capacity (India, China, USA) to improve margins. Low cost Venezuelan crudes may be limited by global sanctions policies and external political events. Previous Venezuelan trade with Russia and China limits current possible trades. Likely changes in USA sanctions may close this window for global competition.
For now a Dynamic India has another source of crude oil at the advantage of global refiners like Reliance. The benefits for lower cost crude oil will come to Indian refiners and the general Indian fossil fuel supply and demands. A Dynamic India needs to use this window of favorable global pricing conditions to make the changes to fuels policy, subsidies, distribution controls, and future fossil fuel productive capacities for long term benefits.
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