Oil Traders Selling Pricey Russian Crude Chafe Indian Refiners

Serene Cheong and Debjit Chakraborty
Tue, April 12, 2022, 

(Bloomberg) -- Indian refiners that are among the few remaining eager buyers of Russian oil are baffled as to why they’re paying nearly full cost for cargoes that are being offered at record discounts in Europe.

Processors in the South Asian nation recently bought millions of barrels of Urals crude via open tenders, with some supplies going at a premium of $1 a barrel to London’s Dated Brent benchmark on a delivered basis, said traders. That compares with discounts of more than $30 a barrel for the same grade in Europe.

Officials at the Indian refineries said they don’t understand why they’re not receiving offers of discounts anywhere near what they’re seeing in Europe when they’ve been vocally supportive of continuing to import Russian crude. The lack of price cuts is especially galling for them as the invasion sent prices to more than $100 a barrel, adding inflationary concerns to the poorest major oil importer.

India is under pressure from allies including the U.S. to stop importing Russian energy to deprive Vladimir Putin of income to keep the economy afloat and fund the invasion of Ukraine. Russia and India have been long-time trade partners in everything from energy to food to weapons.

India’s state refiners usually procure spot crude via open tenders, in which prospective sellers submit their interest along with details on the oil type, volume, price and other offer terms.

The process is aimed at transparency and accountability, but it can be gamed by sellers who have a good sense of what price they need to beat, said refinery officials. Offers for Urals have been just slightly cheaper than other medium-sour grades typically sold to India such as Oman and Upper Zakum, instead of the deep discounts seen offered in Europe, they said.

The seller of many of the spot cargoes was Vitol Group, said the officials, who can’t be named because of company policy. Vitol declined to comment on specific trading activities.

Traders said that anyone who’s able to load Urals at prices near the discounted European offers would be making a profit between $10 and $20 a barrel for sales into India, after taking into account freight, insurance and other costs. Those are staggering profits in an industry where competition usually shaves margins to a few cents a barrel.

In late March, Suezmax tankers with a capacity of 1 million barrels were chartered at the equivalent of near $5 a barrel to transport crude from the Black Sea to India. The backwardated market structure meant the loss of another $4 a barrel during the month-long journey, among other costs. That still adds up to profits of $10 million to $20 million for the shipment, traders estimated.

Little Competition

Just a handful of companies are lifting Urals and selling it in Asia, said Indian refinery officials. This means there’s not a lot of competition, which is needed to drive down offers, they said.

More sellers are entering the market as traders get clarity on the various restrictions and sanctions on Russia and as workarounds emerge. This is beginning to increase the discounts offered to Indian buyers.

Tanker fixtures and port agent reports show that companies such as Vitol, Trafigura Group, Petraco Oil, Glencore PLC, Litasco SA and Gunvor Group continue to load crude from Russian ports, likely via pre-existing contracts entered before Ukraine’s invasion. The cargoes may sail directly to buyers, or undergo what’s known as ship-to-ship transfers onto larger vessels to save on freight costs or for other strategic reasons.

Indian refiners have historically been passive buyers, taking the best price offered to them via tenders, as opposed to setting up separate trading arms. That leaves them without trading units that can scour the global market for the most affordable physical oil grades, and even buy, sell and swap cargoes for profits, like Chinese state-owned refiners do.