Deven Choksey, managing director of brokerage firm KR Choksey, said, if the world puts pressure on the US to lift sanctions from Iran, it will ease terms of crude oil trade and bring down the prices.
The decision by the US and the UK to ban imports of crude oil from Russia in phases has opened up a huge opportunity for India to look at importing crude oil from the country at lower rates. On March 8, Russian Ural crude was trading at a discount of $24/barrel to Brent crude in Western European markets .
State-run oil marketing companies (OMCs) want the government to set up a payment mechanism similar to the one instituted in 2018-19 to pay for Iranian crude oil, as Tehran came under US sanctions.
“It is an opportunity to build inventories for next three months at low costs, in order to prepare for a period when the current inventory gains could deplete if spot prices still hover above $100 per barrel,” said a senior OMC official.
Large insurers have refused to insure vessels carrying Russian crude after the economic sanctions on Russia by the US and its western allies that resulted in a sharp drop in Russian crude price. The gap between the Brent price and Russian crude has widened in the past week.
“If government works out a mechanism similar to Rupee-Rial trade we had with Iran in 2018-19, it would become easier for oil companies to import from Russia in the current situation,” the OMC official said. “However, we will wait for a formal government directive on importing Russian crude. Till then, we will be sufficiently backed by crude from Middle East and Latin America,” the official said.
India used to meet about 10% of its oil requirements from Iran till US sanctions were imposed in 2018 after the nuclear deal between US and Iran was called off. Following the sanctions, India and Iran entered into a Rupee-Rial trade agreement, under which India imported oil from Iran using a rupee-based payment mechanism where 50% of the payment towards oil imports will be earmarked for clearing the payments due to the exporters of other goods from India. In FY19 India imported around $13.52 billion worth of oil from Iran out of its total crude oil import of $111.9 billion. Imports from Iran has since stopped.
Deven Choksey, managing director of brokerage firm KR Choksey, said, if the world puts pressure on the US to lift sanctions from Iran, it will ease terms of crude oil trade and bring down the prices.
Experts believe since the US imported around 0.7 million barrels of oil per day from Russia, a part of that can certainly be bought to India and even otherwise government should look at importing the discounted crude to India.
Srinivasalu Thangapandian, an independent analyst and former Essar Oil’s Stanlow Refinery official, said, “A government-to-government negotiation should be held and a mechanism should be drafted at the earliest. Russia can easily sell this crude to China which is also a high oil dependent economy,” . “If shipping and insurance is going to be a challenge Indian government should ask for cost insurance freight (CIF) based deliveries as was provided by Iran and Russians will be willing to do that,” Thangapandian said.
In CIF, the exporters deliver it to the site through their own ships.
Experts also noted that India can look at innovative trading practices that came into vogue during the pandemic instead of entering into direct contracts with the Russians due to logistics related issue of supplies through a long South China sea route that could be a costly affair and would offset the price discount.
“India can look at high sea exchange or swaps where a buyer of crude in North Sea can swap for its crude supplies from Malaysia with India’s Russian crude supplies at a negotiated price. This would help companies save on high logistics costs and supply risks involved,” said a Mumbai based consultant with the big four advisory firms.
India should get this crude for not just PSU oil companies but also for Nayara’s Vadinar refinery that is 49.5% held by Russian Rosneft, the consultant said.
India imported around 43,400 barrels of oil per day from Russia in 2021, which is less than 1% of its total oil imports.