India threatens Russia with cuts in oil purchases for two reasons

By Olga Samofalova

India is promising to drastically cut its purchases of Russian oil as the price of Middle Eastern oil has become more attractive. It would be a major blow for Russia to lose such a large buyer, and particularly given the current sanctions. However, analysts are confident that there is no reason to worry. Why?
India wants to reduce dependence on Russian oil as suppliers in the Middle East are offering better terms. “The price margins of the Gulf countries are now much more attractive,”the Indian Oil Minister Hardeep Puri said. .

Up until the spring of 2022, Russian oil supplies to India were small, its share in imports was below 1%. Since then, however, India's consumption of Russian oil has skyrocketed to 40% of all its oil imports.

In 2022, oil supplies to India were increased by 22 times, said the Russian Deputy Prime Minister Alexander Novak. According to India, in the fiscal year 2022-2023 (from April 1 to March 31), Russia became the main exporter of oil to India, which supplied 50.84 million tons of oil. All these volumes were redirected from Western markets. At the same time, Russia pushed Iraq, Saudi Arabia and the UAE from the main positions.

However, in July and August, an opposite trend has been observed - Russian oil supplies to India began to decline. In July, they fell for the first time in 9 months - by 5.7% to 1.85 million barrels per day. However, purchases of oil from Saudi Arabia did not grow, and even collapsed - by 26% to 470 thousand barrels per day. This is the minimum value for 2.5 years. According to data provided by Prime.

In August, according to Kpler, oil imports from Russia fell to 1.57 million barrels per day, down 24% from a month earlier. This is the lowest figure since January. “I made myself very clear. Today we are in the market and will buy from anyone,” added the Indian Oil Minister. Will Russia be able to lose such a major buyer of its oil as India? Analysts don't think so.

“Russian oil is getting more expensive, the discount is shrinking, and the Indian minister doesn't like it.

Delhi has earned huge windfall profits from refining Russian oil and then exporting oil products. Moreover, even before 2022, India was building oil refineries on the coast in order to buy Middle Eastern oil and then export it in the form of oil products. Then Russia needed to enter non-Western markets, so Moscow began to provide a discount, and India switched to mass purchases of Russian oil,” says Igor Yushkov, an analyst at the Russian Financial University and the National Energy Security Fund.

According to him, India's business of refining imported oil remained profitable even when Delhi had to buy oil at the normal market price, and then Russia began to give a discount of around $35 per barrel. Of course, India seized on this "golden opportunity". However, the discount on Russian oil has been gradually decreasing.

If at first the maximum discount was $35 per barrel, then at the end of July 2023 it dropped to $15 against the North Sea Brent standard, The Russian Energy Minister Nikolai Shulginov said . And the discounts on Russian oil for Indian refineries have fallen even more. This led to the fact that batches of the main export mixture - Urals - rose in price and became higher than the price ceiling set by the G7 countries ($60).

“The discount for Russian oil has decreased due to a decrease in freight costs and, in general, due to a decrease in the supply of oil on the market due to restrictions within OPEC +,” said Philip Muradyan, Senior Director for Corporate Ratings at Expert RA.

“Of course India doesn't like the discount cuts. I think the oil minister's statement should be seen as an attempt to keep the discount. This as such is a form of blackmail: if you lower the discount, then we will buy more oil from other suppliers. This is an element of bargaining,” Igor Yushkov believes.

On the other hand, the analyst believes, Delhi wants to demonstrate to Western countries that it is putting pressure on Moscow. “The West is constantly pocking at India. Some talk about the need to ban the purchase of Indian oil products because they are made from Russian oil. Others say that India does not comply with the price ceiling, although it only applies to the transportation of oil. Therefore, Delhi would like to fight off attacks from the West,” the analyst adds.

But India's main motive is still economic: it wants to keep its super-profitable business it has gained thanks to Russian oil.

And despite the fact that Russia has become the largest supplier of oil to India, the country does not have a serious dependence on Moscow. Delhi still buys oil from Iraq, Saudi Arabia, the UAE and even the US. In fiscal year 2022-2023, India bought 50.84 million tons of oil from Russia, and almost the same from Iraq - 50.31 million tons. Saudi Arabia delivered almost 40 million tons to India over the same period, the UAE 21.5 million tons and the US another 15.2 million tons. That is, India bought about 51 million tons of oil from Russia, and 127 million tons of oil from all other countries. Oil supplies are well diversified.

However, the cost of Russian oil was, of course, much more profitable: India paid $31 billion for Russian imports, and $2.4 billion more for almost the same volume of Iraqi oil. That is, Delhi saved decent money on the purchase of Russian oil. At the same time, there is no fierce competition between Russia and the Arabs in the Indian market. Therefore, we are not talking about the fact that the Saudis suddenly began to reduce prices.

On the other hand, when Russia came to the Indian market, Arab oil went to the markets of Europe and the United States, where it "happily took our place," the analyst pointed out. Thanks to this, Delhi is one of the largest suppliers of petroleum products to the European market, and the second largest supplier of petroleum products to the United States.

As a result, there is no need to talk about any crisis in Russia's relations with India.

“If Russia's discount is reduced to such a value, when Delhi will find it actually be more profitable to buy more Middle Eastern oil, then Moscow will simply increase the discount. And with the help of fine-tuning, we will set the final discount on Russian oil for Indian refineries,” the source says.

For India, by the way, is also unprofitable to abandon Russian oil. “If this happens, then the history of the spring of last year will be repeated, when the US and the EU did not buy Russian oil, it reduced production and the market faced a deficit. It was then that oil prices exceeded $100 per barrel. In this case, India will have to buy more expensive oil and its oil products will become more expensive. The demand in this case will fall, because people tend to save,” explains the analyst.

Bloomberg economists estimate that every $10 increase in oil prices leads to an increase in India's budget deficit by $10 billion and a decrease in GDP by about 0.5%. Therefore, Yushkov is confident that India will remain a major market for Russia, and Russia a major supplier for India.
This article originally appeared in Russian at vz.ru and was translated and edited by Rhod Mackenzie