Peace, commerce, and honest friendship with all nations; entangling alliances with none – Thomas Jefferson
The making of a great nation is not just mature politics and good economics but how well the two are coordinated. An ‘energetic’ outlook is the clear winner in the present politico-economic turbulence. The 1971 Indo-Soviet Treaty intended to provide strategic autonomy to India in a polarised world. Though the Treaty is now history as much as the Soviet Union is, the 1993 Indo-Russian Friendship Treaty paved the way for a relatively unorthodox trade understanding between the two.
Ukraine war-induced G7 sanctions were feared to cast a shadow on this ‘cordiality’. It was not to be so. Oil slipped in to provide succour! With a mere 1% share in India’s crude oil imports before the Ukraine conflict, Russian oil constituted 34% of the import basket in March 2023.
While the Urals comprised 80% of India’s Russian oil imports in January 2023, it fell to 70% in March, expressive of contracting imports from Russia. In reality, Russia continued as the top supplier in April, with a 36% share in India’s oil imports, compensating with higher components of ESPO Blend, Navy Port Light and Siberian Light (the sweeter grades). Despite enjoying a price advantage, sour crudes lose on refining costs due to high sulphur content. Sweeter grades with a much lower sulphur content facilitate efficient, cost-effective refining and better throughput. Aware of the preference for low-sulphur crude, Russia upped quality control last year by modifying Urals blend via production curbs on specific high sulphur-content oil fields.
Since this January, most of India’s oil imports from Russia have been denominated in UAE dirhams and Russian roubles. The existing rupee-rouble arrangement is already under strain due to rising imports, especially fertilisers, which have shown a 3.4 times jump in 2022. A fall in India’s exports to Russia has led to a vast trade surplus favouring the latter. This could dent India’s oil imports as Moscow is reluctant to hold a large inventory of Indian rupees.
With Sino-Russia relations warming amid evolving trade links since the beginning of this year, almost the entire import bill of China from Russia, mostly comprising crude, is now settled in yuan. China National Petroleum Corporation (CNPC), the State energy giant, is rumoured to have agreed with Gazprom, a global oil and gas company headquartered in Moscow, to receive pipeline gas against yuan and rouble payment. China already receives ESPO blend from Rosneft through the East Siberia-Pacific Ocean pipeline under an intergovernmental accord. Refineries within Russia are subject to maintenance during May, resulting in lower domestic demand, which leaves higher stocks for export. This prompted Chinese refiners to seek cheaper Urals from Russia, and the import of discounted oil touched a record high.
Russian oil, a staple feed of China’s teapots (small independent refineries in China) since the Ukraine crisis, is now cornered by State-owned and large private refiners. These smaller refiners, mostly based around Shandong province and accounting for one-fifth of crude imports, are thus turning to Iran and other Middle East fields. Earlier in the year, Beijing had mooted Saudi oil imports to be settled in local currency (The Shifting Sands of Oil Economies - TNIE, May 9, 2023). With higher prices and low margins, a slowing run rate (crude processed relative to total capacity) is imminent at Chinese teapots, compelling some to request lower volumes from Saudi Aramco in June. Aware of these developments and anticipating more crude to hit the market as Russian refineries go into maintenance, Aramco announced minor price reductions on Arab Light while offering bigger cuts on prices of Arab Medium and Arab Heavy grades for June supplies to Asia. The move could benefit India.
But as more Asian buyers go into shutdowns for periodic maintenance in the remaining two quarters, it could renew the strain on oil prices as demand moderates. Thus, the topic of trimming production could figure again at the scheduled meeting of OPEC+ in Vienna on June 4, creating a Catch 22 situation. This time, the cut could involve broader fraternity participation.
In the current scenario, it would be erroneous to interpret any fall in the import of oil from Russia as an aspersion on Indo-Russian relations. The rising Chinese demand has emboldened Russian suppliers to discontinue offers of heavily discounted oil to India. Russia surpassed Saudi Arabia as China’s top supplier of crude in the first quarter of 2023 and, in a bid to retain dominance, may continue to offer oil at a competitive price while accepting payment in yuan. Despite more oil finding its way into Sino territory, a deep tightening of supplies to India is not foreseen as Russia would simultaneously try to maintain its significance in India’s oil market.
Iraq is keen to regain its lead in Indian imports and offered to negotiate discounted prices earlier in the year. Saudi Arabia, enthusiastic about its growing trade ties with India, could offer ‘bargains’. While moving into a surplus zone, the US may increase its share in the Indian basket, buckling under global competition. As the world’s third-largest oil consumer and a significant participant in the mutating oil politics, India continues to explore options and entice other non-OPEC+ producers, especially in Latin America and the Caribbean. A lot would rest on how India plays its cards in the intriguing game of oil.
Ranjan Tandon
Senior markets specialist and author