India’s import of discounted Russian crude oil is likely to have peaked in June and could be headed for a month-on-month decline in July, marking the first instance of sequential fall in almost a year, as per estimates by commodity market analytics and intelligence firm Kpler.
According to Viktor Katona, Kpler’s Lead Crude Analyst, a decline in oil production in Russia and a higher demand pull from Russian refineries is expected to result in slightly lower dispatches to India. There are also expectations of a slight contraction in demand from Indian refiners in July and August as a few units would be under maintenance shutdowns during the monsoon, as the rainy season usually marks a dip in India’s oil demand.
In June, Indian refiners imported 2.17 million barrels per day (bpd) of Russian crude, accounting for a little over 45 per cent of India’s total oil imports of 4.78 million bpd for the month, an analysis of Kpler data showed. The average daily quantity of Russian oil imported into India in June was marginally higher than the previous peak of 2.15 million bpd in May.
ADVERTISEMENT
From being a marginal player in India’s oil trade before the war in Ukraine, Russia is now New Delhi’s biggest source of crude oil. And for Moscow, India is now the biggest consumer of seaborne Russian crude oil. Indian refiners started snapping up Russian oil soon after the latter’s February 2022 invasion of Ukraine, as Russia started offering deep discounts on its oil.
India’s Russian crude imports in June were more than the cumulative oil import volumes from at least the next four biggest suppliers–Iraq, Saudi Arabia, United States, and United Arab Emirates. For the second month running, state-owned Indian Oil Corporation (IOC) beat private sector major Reliance Industries (RIL) as India’s biggest importer of Russian crude.
July, however, is expected to mark the first instance of a sequential fall in India’s Russian oil imports since August of last year. Kpler estimates 2 million bpd as the sustainable peak of India’s consumption of Russian oil. India’s overall refining capacity stands at around 5 million bpd and the country, while being the third-largest consumer of crude oil globally, depends on imports to meet over 85 per cent of its requirement of the commodity.
“We believe India’s imports of Russian crude will see a slight downward correction to 2 million bpd, which will be the sustainable level of buying that disregards whatever domestic dynamics Russian producers are facing,” Katona told The Indian Express. According to him, the nearly 2.20 million bpd of Russian oil imported by Indian refiners in May as well as June was “really a one-off event” driven by maintenance of Russian refineries during the period.
ADVERTISEMENT
Russia had its refinery maintenance peak from mid-May and mid-June, which lowered that country’s crude oil consumption and triggered an upswing in oil exports, mainly to India.
However, the Russian refineries are now out of maintenance and are consuming a total of around 5.6 million bpd of crude oil, up from around 5 million bpd during the peak maintenance season. Additionally, Russia’s overall crude oil production has also seen some decline and is unlikely to rise notably, given that Moscow will have to stick to its agreed production targets as part of the coordinated output action by OPEC+ group of major oil producing nations.
The next round of refinery maintenance works in Russia is expected in September-October, and Katona believes that there could be another upswing in Russian oil supplies to India during that period. By then, the planned maintenance works at Indian refineries during the ongoing monsoon season are also expected to be completed, which means that India’s oil demand should be at normal levels at the time.
ADVERTISEMENT
Over the past two-three months, industry watchers and experts have been indicating that India appears to be testing its limits of Russian oil imports. Apart from the factors already mentioned, another key reason is the soft limit placed by Indian refiners’ purchase commitments for sour grades of crude under term contracts with their traditional suppliers in West Asia.
The medium-sour grade Urals crude has been the mainstay of India’s Russian oil imports. West Asian nations have traditionally been India’s major suppliers of sour crudes, and a considerable portion of these supplies are under annual term contracts, which have minimum purchase commitments. Most of the Russian oil, on the other hand, is being bought by Indian refiners on spot basis. This essentially means that the extent to which Urals can replace other sour crudes is limited by Indian refiners’ minimum offtake commitments under term deals.