India is importing more Russian crude petroleum than was ever predicted. Paying for Russian imports has become more difficult. The future conduct of oil trades is less clear. Indian refineries continue to benefit from low cost crude. Beneficiaries should not become dependent on cheap crude.
EkaLore is continuing to look at the benefits, logistics, and outlook for a Dynamic India of the global energy markets. These temporary benefits will lead to shocks in the future if a dependency is created.
Russian crude imports to India were 1.78 million barrels per day (bpd) in September 2023 (Kpler). Imports to India from Russia have varied from a starting level of essentially zero in January 2022 to increasing 15% in September 2023 over August. August levels were down to 3.9M bpd from high levels of 4.7M bpd then increased in September even as prices increased. Crude oil prices for benchmark Brent Crude (USD$93.89) and West Texas Intermediate (WTI, USD$90.16) peaked to 2023 highs.
Global demands reflected China, aviation fuels, and petrochemical production (industrial and product uses). Total Russian production has dropped with exports to China and India accounting for 3.9M bpd in August 2023 compared to 4.7M bpd in April and May. The two destinations took more than 50% of all Russian exports in August. India has become a key destination for crude exports even as the total volume of Russian production is constrained.
Major imports into India saw state-run Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL), and Hindustan Petroleum Corp(HPCL) take major tanker loads of crude. Major private Indian refiners like Reliance have also upped their imports. Profit margins for fuels and intermediate refinery products have been supported by global markets. The Russian exports came from Rosneft, Gazprom, and Gazprom Neft.
Profits, and lowered costs of domestic products, can be seen in the imported costs for crude for Indian refiners. Russian crude costs of up to USD$15-20 per barrel are compared to USD$5-7 per barrel of USA Mars-grade crude (1.93% sulfur heavy crude) FOB India. Alternate logistics costs for insurance, vessels, transit time, and reduced trades “on-the-water” increase Russian export costs while sanctions regulate overall prices paid by Indian importers. Global crude prices rose to over 50% more than sanctioned Russian exports with Indian refiners benefiting. Exports of lower-cost fuels and intermediate products into Middle Eastern markets also increased trading profits after refining. At a level of more than 53M barrels in the month of September the benefits (lowered costs to Indian consumption or higher export earnings) were substantial.
The imbalance of payments to Russia from India has seen IOC pay Russia with Chinese Yuan. BPCL and HPCL have not used Chinese Yuan to date from current reports. Payments to Russian exporters have been made in UAE Dirham as well as “offshore dollars”. The status of the India Rupee, not being a completely floating international currency, makes Russian exporters less interested in accepting it as a payment. The Indian Central Bank has created a mechanism for Rupee payments for crude oil imports. This has not been favored by Russian exporters as countertrade and accumulated Rupee balances have not been seen as easily translated profits.
Rupees payments are exchanged into Hong Kong Dollars (HKD) in current exchange transactions and then into Chinese Yuan. The two currency conversions cost 2-3% more than UAE currency (dirham) with the transactions subject to currency exchange risks as well (hedged or not). Russian trade has a far larger set of opportunities in Chinese Yuan than Indian Rupees. The Indian government is less served by the Chinese Yuan becoming the trade-settlement currency and has communicated its preference to refinery operators to not settling in Chinese Yuan.
Larger questions are the need for reforms in Indian domestic fuels pricing, beneficiaries of low cost chemical feedstocks, and energy infrastructure investments. The temporary nature of the gains from low-cost Russian crude imports creates a set of opportunities in each of these areas to improve Indian efficiencies with transition costs buffered during a period of high margins. The duration of the gains can’t easily be forecast so the time to act is more immediate.
Taking advantage of short term gains without improving efficiencies will create even larger economic shocks when prices return to global norms. Bureaucratic and political gains from benefits need to be tempered. Mid and long term benefits come using the short term gains to build capability, infrastructure capacities and agility, and trade financing mechanisms with sustaining qualities. The durability of a robust trade financing capability will complement increases in Make In India electronics exports, efforts in vehicle parts exports, and continued growth in other sectors.
For more analysis and notes on a Dynamic India see http://www.ekalore.com/india-business
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