Crude Prices Surge to $60, Creating Trade Challenges for India in Russian Oil

New Delhi: As the price of Urals, Russia's primary oil export grade, breaches the $60-per-barrel cap imposed by Western nations to restrict Moscow's revenue, one of the top purchasers of Russian oil is bracing for trading difficulties. Since the invasion of Ukraine over a year ago, India and China have emerged as the dominant buyers of Russian crude, as other nations have shied away from the OPEC+ producer. However, with the Urals surpassing the limit set by the Group of Seven, importers will now face heightened scrutiny regarding their purchases.

Officials from three Indian refiners, speaking on the condition of anonymity, revealed that they are preparing for tougher negotiations with local banks involved in financing their Russian oil shipments, expecting an increased demand for evidence to verify purchase prices.

The price cap was established to maintain the flow of Russian oil while curbing the Kremlin's revenue and its ability to finance the conflict in Ukraine. If crude is purchased above the $60-per-barrel limit, importers are unable to utilize Western services like insurance and shipping, resulting in the emergence of an extensive network of clandestine tankers to circumvent sanctions.

Asian buyers frequently rely on this fleet to import crude from Russia and other countries, including Iran. Officials from two Chinese refiners stated that their recent purchases of Russian oil have largely been conducted without the involvement of Western financial, insurance, and shipping services.

According to the price reporting agency Argus Media, Urals surpassed $60 per barrel on Wednesday at its loading port on a free-on-board (FOB) basis. However, Asian buyers find some consolation as these assessments provide a good reference but do not precisely predict the purchase prices paid by buyers.

Most Russian cargoes purchased by Asian refiners are on a delivered basis, which accounts for the price of crude at the loading port along with shipping and other miscellaneous costs, rather than on an FOB basis, which is subject to the price cap. The delivered price is typically determined by a formula that includes a privately-negotiated discount to the month-average of global benchmarks like Brent or Dubai oil during the loading month, allowing some flexibility in valuing the net-back cost of cargoes.

An Indian official mentioned that the refinery's purchases of Urals for July loading could potentially exceed the cap, depending on the performance of Brent and other benchmarks for the remainder of the month. The official suggested that the company may need to explore the use of different currencies.

Indian refiners have experimented with currencies such as dirhams, rubles, and rupees for Russian crude cargoes. More recently, Russian sellers have shown increasing interest in using yuan for crude sold to India.

Disruptions to Russian crude flows to India could have repercussions across global oil markets, coinciding with reduced supply from Moscow and Riyadh, and an anticipated tightening of the market. Currently, India imports nearly half of its oil from Russia, with Urals constituting a significant portion of the barrels. In the event of a major impact on imports, Indian refiners may need to seek additional cargoes from West Africa, Abu Dhabi, Saudi Arabia, or Iraq.

Not all Russian oil deals in Asia will be affected by the rising Urals prices. A substantial portion of Russia's seaborne exports to China consists of ESPO Blend, a higher-quality grade typically priced above the $60-per-barrel cap. Given its consistently higher price, exports of this grade from ports in eastern Russia already rely on the shadow fleet and insurers willing to handle such trades.

Indian and Chinese refiners cautioned that the final price for most Russian cargoes loading in July will only be determined at the end of the month, leaving many to adopt a wait-and-see approach. An Indian official mentioned that buyers will focus on negotiating larger discounts to reduce the final FOB cost and bring it below $60 per barrel if Brent or Dubai prices rise, as these benchmarks form the major pricing component.