Iraq discounts heavily to muscle out cheaper Russian oil in India

Iraq boosted its share in June to 26% of total Indian crude imports from 24% in May

India is the last big market left for foreign crude oil suppliers where the door will probably be shut last. And that explains why West Asian crude suppliers led by Iraq are trying to muscle in to retain market share that they have been losing to Russia over the past few months.

Iraq, India’s biggest oil supplier, undercut Russia in June by supplying a range of crudes that on an average cost $9 a barrel less than Russian oil. A similar $9 a barrel discount in favour of Russian oil in May had led to a mild erosion of Iraq’s share. The West Asian nation was quick to react by offering a wider variety of crudes from Basrah Light to Basrah Heavy to India at different price points, keeping overall costs lower, an official with a state refiner said.

Iraq boosted its share in June to 26 per cent of total Indian crude imports from 24 per cent in May after its cost of supply averaged $93 a barrel compared to $102 a barrel for Russia, and $116 a barrel for the Indian crude basket, a domestic index that tracks key crudes sourced by India. Iraq supplied 1.39 million barrels a day in June, 26 per cent higher from May, and compared to 986,000 barrels a day of Russian supplies in June.

The Indian basket of crude oil represents a derived basket comprising 76 per cent of sour grade crudes from West Asia and 24 per cent of sweet grades (Dated Brent benchmark) processed in Indian refineries during 2019-20.

Russia aggressively increasing its share of India’s crude purchases this year from a negligible amount to nearly a fifth has set alarm bells ringing in West Asia. The rise in Russian supplies has come at the expense of Saudi Arabia, the UAE, the US and Mexico, said Rohit Rathod, senior market analyst at London-based data analytics provider Vortexa.

The growing share of Russian oil is reflected in greater detail in India’s customs data available for the April-June period. The share of Russian exports in India’s overall crude purchases more than doubled to 18 per cent in June from 8 per cent in April, when supplies to India started rising after Russia’s invasion of Ukraine. In volume terms, this translated to nearly one million barrels a day of Russian oil in June. Before the conflict in February, Russian supplies were less than 1 per cent of India’s total imports, or averaged around 40,000 barrels a day in January-February.

India wants as much crude as it can get from Iraq because Basrah grades are very attractive for upgraded Indian refineries, and are of great value for the kind of fuels such as diesel that are in demand here, said R Ramachandran, an oil industry consultant, and former refining head of state-owned BPCL. Iraq has succeeded in increasing the availability of Basrah Medium and Basrah Heavy — relatively cheaper than Basrah Light — that are suited for India’s upgraded plants, another industry official said.

Russia’s medium sour Urals, similar to some West Asia grades such as Arab medium, is also suited for refiners when available at a discount, but availability of the grade was an issue in the past, Ramachandran said. Russia sold most of its oil to Europe and China, leaving little for India.

But the war in Ukraine has dramatically changed Russia’s priorities, and India’s crude sourcing patterns. Volumes may rise to 1.1 million barrels a day in the second week of August, according to Vortexa, which tracks ship movements to estimate shipments.

Russia accounted for 22 per cent of India’s July crude imports, according to early estimates by Vortexa, which made it India’s biggest supplier last month. Iraq was the second-largest supplier with 995,000 barrels a day in July, followed by Saudi Arabia with 860,000 barrels a day. Indian customs data based on actual deliveries tend to differ with ship-tracking agencies such as Vortexa and Kpler. Iraq still remains India’s biggest shipper, according to June customs data.

Over 300,000 barrels a day of Russian oil was delivered to Sikka port in July, which supplies Reliance Industries’ Jamnagar facilities. Around 260,000 barrels a day went to Paradip, and 230,000 barrels a day were delivered to Vadinar where IOC and Russian Rosneft-run Nayara Energy own refineries respectively, according to data from UK-based market intelligence company Argus. A pipeline from Vadinar also supplies to BPCL’s Bina, and IOC’s Panipat and Mathura facilities.

Russia’s Urals blend was what is typically available for India but ESPO Blend and CPC Blends, usually shipped to China and Europe, comprised a quarter of Russian supplies in July.

“India may be past a peak in Russian crude procurement for now, as export volumes are slightly easing and competition between China and India for Russian oil appears to be driving up prices,” said David Wech, chief economist, Vortexa. Russian crude prices increased by $8 a barrel in June from May because of increased demand for Russian oil from China and Europe.

The increase in Russian shipments, available at a discount to West Asian and US crudes, initially started cutting into Nigerian spot supplies, and North American oil. Subsequently, from May, it started making inroads into the share of traditional West Asian suppliers.

The share of UAE, US and Nigeria at a combined 28 per cent, and that of Saudi Arabia, traditionally India’s second biggest crude supplier, at 19 per cent in April shrank to 23 and 16 per cent respectively in May, and 14 and 12 per cent in June, customs data showed. Iraq’s share in India’s total crude import basket declined marginally in May from April while that of Russia rose six percentage points to 14 per cent during the period.

Russia is also beefing up its export infrastructure, directing more supplies to the east, especially to China. Geographical and logistical constraints have limited availability of Russian oil to India but an imminent halt to European supplies will free up flows for India in the future. Crude exports through Transneft’s East Siberia-Pacific Ocean (ESPO) system could increase by a fifth to about 840,000 barrels a day this year, according to Russian Deputy Prime Minister Alexander Novak, who said that the country needs to create additional infrastructure for supplies to the east. If Russia manages to make available volumes for India on a consistent basis, India could improve its energy security and diversify from expensive Saudi crudes.