China and India buy Russian crude oil at a 40% discount

The European Union on Friday again failed to reach an agreement on a price cap for Russian oil, with the bloc’s easternmost members, including Poland, Estonia, Latvia and Lithuania, objecting that the proposed $60-$70 per barrel for Russian crude oil is too generous and way over the rates Russia currently sells crude oil.

European Commission Vice President Valdis Dombrovskis has acknowledged as much, saying: “If you set the price ceiling too high, it doesn’t really bite. Oil is the largest source of revenue for the Russian budget, so getting this right is very important to really impact Russia’s ability to finance this war.he told Bloomberg TV.

Well, they’re right: offering $70 a barrel for Russian Urals is incredibly generous, given that Bloomberg just reported that China and India are currently getting them at half that price.

According to Bloomberg oil strategist Julian Lee, Russia’s flagship Urals crude was trading at a massive discount of $33.28, or about 40% to international Brent crude, at the end of last week. In contrast, a year ago Urals was trading at a much smaller discount of $2.85 to Brent. Ural is the main blend exported by Russia. The result: Moscow is starting to feel the heat from its war in Ukraine and could lose ~$4 billion a month in energy revenue, according to Bloomberg calculations.

Washington isn’t losing sleep over it. “If Russian oil is to be sold at bargain prices and we are happy for India to get that bargain or Africa or China. It is fine US Treasury Secretary Janet Yellen previously told Reuters.

Shipping nations such as Greece are in favor of a higher price cap that would help keep trade flowing. However, the situation could turn even more bleak for Russia with EU sanctions against Russian oil coming into effect on December 5 and market disruption expected. if a price ceiling is not in place. Meanwhile, Russia is reportedly drafting a presidential decree that would ban its companies and any trader from selling it to anyone participating in a price cap.

Increasing imports from Russia

Earlier, India was never a big buyer of Russian crude despite having to import 80% of its requirement. In a typical year, India imports only 2-5% of its crude oil from Russia, about the same share as the US did before it announced a 100% ban on Russian energy goods. In fact, India imported only 12 million barrels of Russian crude in 2021, with the majority of its oil coming from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria.

But back in May, reports surfaced of a “significant increase” in Russian oil shipments heading to India.

According to one Bloomberg report, India spent just over $5.1 billion on Russian oil, gas and coal in the first three months after the invasion, more than five times the value of a year ago. However, China remains the biggest buyer of Russian energy commodities, spending $18.9 billion in the three months to the end of May, almost double a year earlier.

And it’s about the money.

According to the International Energy Agency (IEA), Urals crude has been offered at record discounts since the war began. In the first months after the start of the war, Ellen Wald, president of Transversal Consulting, told CNBC that a few commodity trading firms—such as Glencore and Vitol – offered discounts of $30 and $25 per barrel for the Ural blend.

The experts say that simple economics is the main reason why White House pressure to curb crude purchases from Russia has fallen on deaf ears in Delhi.

“Today, the Indian government’s motivation is economic, not political. India will always look for a deal in their oil import strategy. It’s hard not to take a 20% discount on crude oil when you import 80-85% of your oil, especially on the heels of the pandemic and the global growth slowdown,” Samir N. Kapadia, head of trading at consulting firm Vogel Group, told CNBC via email.

Still, it will not be lost on many readers that India has maintained a cozy relationship with Russia over the years, with Russia supplying the Asian nation with as much as 60% of its military and defense-related equipment. Russia has also been an important ally on crucial issues such as India’s dispute with China and Pakistan over the territory of Kashmir.

But hey, India and China aren’t the only ones to blame here. Reports have emerged that while supplies of Russian pipeline gas – the bulk of Europe’s gas imports before the Ukraine war – are currently down to a trickle, Europe has been hungrily scooping up Russian LNG.

Europe has been working hard to wean itself off Russian energy commodities ever since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of a key source of revenue to wage its war in Ukraine.

But ditching Russian gas has turned out to be more burdensome than Europe had hoped for. While supplies of Russian pipeline gas – the bulk of Europe’s gas imports before the Ukraine war – are down to a trickle, Europe has been hungrily seeking out Russian LNG. The Wall Street Journal has reported that the bloc’s imports of Russian liquefied natural gas rose 41% this year through August.

Russian LNG has been the dark horse of the sanctions regime,Maria Shagina, a researcher at the London-based International Institute for Strategic Studies, told the WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that purchases of LNG from Russia and other suppliers have helped keep European energy prices in check.

By Alex Kimani for Oilprice.com

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