Iraq closes gap with Russian oil in FY24 as Moscow’s discounts shrink | Economy & Policy News

The allure of cheap Russian crude to Indian refiners faded in the financial year 2023-2024 (FY24) after Russian discounts shrunk and Iraq offered better rates to claw back into the Indian crude market, Indian government data show. The rising costs of sourcing Russian crude may contribute to lower gross refining margins of Indian state-run companies in the previous quarter, industry officials said.

Russian oil was cheaper than Iraqi crude by less than $3 per barrel in FY24 compared to over $7 per barrel a year earlier, according to calculations by Business Standard based on customs data. Iraq was India’s biggest crude supplier until two years back but the Russian invasion of Ukraine forced Moscow to redirect its European supplies to China and India at steep discounts, becoming India’s biggest crude source in fiscal 2024.

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Russian supplies averaged $76.4 per barrel in FY24 on a landed basis in India compared to $79 per barrel for Iraqi shipments. In FY23, Iraqi oil averaged $90.6 per barrel compared to $83.2 per barrel for Russian oil. Venezuelan crude was the cheapest last tax at $64 per barrel because it is a poor quality, heavy, high sulfur grade, which can be processed only by advanced refineries like Reliance Industries’ Jamnagar facility in Gujarat.

Iraqi grades have turned cheaper in calendar 2024. Iraqi benchmark Basrah oil was cheaper than Russian oil by $2 per barrel in March, for which latest data is available – Iraqi oil averaged $78.6 per barrel in March compared to $80.6 per barrel for Russian oil, customs data showed. Indian refiners are buying heavier grades of Basrah crude on which Iraq is offering small discounts, said a Mumbai-based refiner. He did not give details. But there are limitations on how crude Iraq can supply India, the refining official said, compared to Russia, which supplied record volumes of over 2 million barrels per day in mid-2023, the official said.

Lower rates are reflected in higher volumes. Volumes from Iraq averaged 1.35 million barrels per day in March compared to just 1 million b/d for entire FY24, customs data shows. Russian supplies averaged 1.69 million barrels per day in March compared to $1.67 million barrels per day for the entire FY24. In FY23, Iraqi and Russian volumes were similar at 1.02 million barrels per day.

Russia emerged as a third front on crude sourcing for India after Iraq and Saudi Arabia after the invasion of Ukraine in February 2022, cutting Russian crude exports off from Europe. Before the Ukraine conflict, Russia had a greater 2 per cent share of the Indian crude market compared to 24 per cent for Iraq in 2021.

The resurgence of Iraqi oil can be attributed to two factors, said Indian refining sources. The tightening of US sanctions on Russian shipping coupled with reduced availability of Russian oil due to its participation in the OPEC+ grouping’s production cuts has hurt discounts. Also, Baghdad is offering oil at competitive rates to Indian refiners, a state-run refining official said.

The near halving of Russian discounts in FY24 is reflected in the shrinking gap between Iraqi and Russian oil rates, industry sources said. The discounts are calculated off European crude benchmark Brent on a delivered basis. Discounts offered on Russian oil to India have shrunk since late 2023 by 77 per cent compared to the fourth quarter of FY23, with rates staying in the $3.50 per barrel levels since last October. Discounts averaged only $5.8 per barrel last fiscal compared to $10.5 per barrel in FY23, according to a state-run refining official.

Freight and insurance rates have also increased over the past few months on Russian shipments after nearly 10 per cent of the Russian fleet was affected by fresh US sanctions since imposed last October, an industry official said. Indian refiners purchase Russian oil on a delivered basis and any increase in freight or insurance is adjusted in discounts, told a Mumbai-based refining official.

“If the discounts on purchases of Russian crude persist at the prevailing low levels, India’s net oil import bill may widen to $101-104 billion in FY2025 from $96.1 billion in FY2024, assuming an average crude oil price of $85/bbl in the fiscal, ” said ratings agency ICRA in a note in April.

Oil prices will continue to be volatile, industry officials said, after European benchmark Brent slid sharply to $83 per barrel levels this week from over $90 per barrel in mid-April when tensions between Iran and Israel intensified.

“Geopolitical conflicts in the form of Gaza and Ukraine wars remain very much front and center for oil markets,” said Vandana Hari, a Singapore-based oil expert. “But there appears to be a baseline assumption that matters will not spiral out of control on either front.”