Russia’s oil rebate to India shrinks to $4, delivery cost remains unclear

Shipping costs of US$11-19 per barrel from Russian ports to India – some for the 100+ tankers reportedly acquired by Russian actors for a shadow fleet – are higher than prices for comparable distances such as one Journey from the Persian Gulf to India Rotterdam.

After Moscow’s invasion of Ukraine last February, Russian oil was sanctioned and shunned by European buyers and some in Asia, such as Japan.

This caused Russian Ural crude to trade at a discount to Brent crude (the global benchmark). However, the discount on Russia’s Ural grade value has narrowed to nearly $4 a barrel from a level of around $30 a barrel in the middle of last year, sources said.

Indian refiners, which convert underground crude oil into finished products such as gasoline and diesel, are now the biggest buyers of Russian oil as Chinese imports have reached their limit due to massive electrification of vehicles and demand problems in an unstable economy.

Indian refiners increased their purchases to 44% from less than 2% of their total pre-Ukraine war purchases to secure reduced oil.

However, these rebates have declined as companies such as state-controlled companies such as Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd (BPCL), Mangalore Refinery and Petrochemicals Ltd and HPCL-Mittal Energy Ltd, as well as private companies, have become increasingly affected The Reliance Industries Ltd and Nayara Energy Ltd refiners continue to negotiate contracts with Russia separately.

The rebates could have been higher had state-controlled entities, which account for about 60% of the 2 million barrels a day of Russian oil flowing into India, negotiated together, sources said.

“Chinese demand has peaked and Europe is not buying sea crude from Russia. Thus, India remains the only destination with a growing appetite. And if they (the refiners) had negotiated together, bigger rebates could have been achieved,” a source said.

Keep in mind that IOC is the only company that has a term or fixed volume contract. Other refiners continue to buy on a tender basis.

Before Russia’s invasion of Ukraine last February, India was a small importer of Russian crude, buying about 44,500 barrels per day (bpd) in the 12 months ended February 2022.

India’s purchases of sea crude from Russia exceeded China’s purchases a few months ago. According to sources, Indian refiners are buying crude oil from Russia on a delivery basis, charging Moscow to arrange transportation and insurance.

While oil bills are at or slightly under $60 a barrel, the shipping costs and insurance billed are based on quotes Russia receives from three not-so-well-known agencies that cannot be independently assessed and remain opaque , they said.

The actual selling price for Urals crude is around $70-$75 a barrel, which would allow a large chunk of Russia’s oil revenues to go to the three shadow agencies, they said.

The G7 imposed a price cap of $60 a barrel on Russian oil from December 2022 to limit Moscow’s ability to fund its war in Ukraine.

The price cap meant that companies based in the coalition countries could only continue to provide maritime services for the transport of oil if that oil sold at or below the price cap. Companies based in coalition countries have historically accounted for around 90 percent of the market for relevant marine insurance products and reinsurance.

To obtain ships and insurance, Russia uses an oil price of $60 or less in the bill and bills buyers for shipping and insurance based on quotes obtained from the three agencies, sources said.

By 2022, the Baltic Exchange, a clearing house for the London shipping industry, listed two standardized indicators, TD6 and TD17, which served as benchmarks for shipping costs.

But since the end of 2022, Russian crude oil is no longer sold in Rotterdam and Augusta and the Baltic Exchange has delisted TD17 and changed the TD6 indicator so that it is not necessarily applicable to Russian cargoes.

In addition, other tankers are booked on a time charter basis, which also makes the costs of a single voyage non-transparent. These tankers are not booked through Baltic Exchange shipping brokers, so information on actual costs is lacking, they added.

The share of Russian oil vessels insured in the EU, G7 countries or Norway was 46.3 percent in May, compared to 78 percent in February last year. These countries continue to provide tankers to transport Russian oil.

More than 28% of oil tankers transporting Russian oil came from the EU, the G7 countries or Norway in May 2023, compared to 58% in the pre-war period. Tankers registered in the United Arab Emirates make up 37% (13.4% in the pre-war period) and 12.3% come from China including Hong Kong. The origin of the remaining 22% is unknown.

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