India’s top oil refiners have hit the jackpot in the wake of the Russia-Ukraine war. They are buying Russia’s flagship Urals oil at huge discounts and reselling it, mostly in Asia and Africa, at much higher international prices. The war has gone on much longer than anyone expected with no sign of it ending, but India’s refiners certainly aren’t complaining.

This is quite a turnaround from the past. India has never been a big buyer of Russian oil, mainly because shipping it from Russia takes anywhere upwards of 45 days and that’s too expensive. By contrast, India is lucky to be living virtually next-door to the Middle East and transporting oil from Iraq to a western Indian port takes barely six days.

Before the war, India’s oil purchases from Russia usually covered about 2 per cent of its needs. In February, as Russia’s armed forces massed on Ukraine’s border, India’s oil buying from Russia dropped to zero. Now the numbers are drastically different.

India imported 840,645 barrels per day (bpd) of Russian crude in May, up from 388,666 bpd in April and 136,774 bpd in May last year, Kpler data showed. June imports are estimated at 1.05 million bpd. “From a grand total of zero, it’s got to a million barrels,” says Viktor Katona, Crude Analysis co-head at analytics firm Kpler. This means that from 2 per cent, Russian Urals crude will form around 20 per cent of India’s total buying.

The reason why Indian refiners are so eagerly waiting for their ships to come in from Russia isn’t hard to figure out. In the wake of the war, India is getting discounts of between $30 and $40 below the ruling Brent prices as Western sanctions have caused offer levels for Russian fuel to crash. That means when Brent prices were hovering at $125 per barrel, India’s refiners were buying at $90-95. For a while, India was the world’s biggest buyer of Russian oil, ahead of even China, by far the world’s biggest oil consumer.

“The actual price Indian refiners pay is by far the cheapest option they can get. With this, effectively, you’ve got profits so big the $1-2 extra on shipping no longer matters,” explains Katona. “Refiners realised it was just too good a business not to go into,” he said. Brent prices have since fallen to $113 a barrel but Indian refiners are still getting the discounts.

Private-sector refiners like Reliance and Nayara Energy are leading the way with purchases of an estimated 250,000 bpd last month. The public-sector giants, though, aren’t far behind and purchased the remaining 450,000. Nayara Energy (formerly Essar Oil) is 49 per cent owned by state-owned Rosneft, Russia’s largest oil producer.

Could Indian companies face disfavour with the US and Western Europe for guzzling Russian oil while everyone else has to tighten their belts due to sanctions? This seems unlikely, traders say. Western countries are not erecting hurdles that would block India from buying more Russian oil because prices would shoot up if oil didn’t come onto the global market via India. So while the West is taking itself off the Russian oil market, Indian buying is helping to keep the lid on international prices. Bear in mind, that when prices rise, Russia rakes in more money.

Also, the international scene is riddled with tough contradictions. The Americans have manoeuvred themselves into a tremendously difficult position. Donald Trump backtracked on Barack Obama’s deal with Iran and reimposed sanctions on the country which is a leading global oil player. US President Joe Biden attempted to strike a quick deal with Iran but hit roadblocks even before the Russian crisis began. Now the US finds itself with sanctions on both Iran and Russia. The result is shortages are constantly building up, putting pressure on prices.

US-Saudi Arabia relations

Throw in the fact that the usually warm US relations with Riyadh are chilly at the moment due to Saudi Arabia’s brutal murder of Saudi journalist Jamal Khashoggi that obliged the US to take a disapproving stance. When the war erupted, Biden was placed in an invidious situation of having to mend fences with the Saudis but that doesn’t appear to have borne fruit yet. A visit to the Middle Eastern country appears to have been pushed further into the future than the Americans would have liked.

So how are the Saudis faring with the war? Oil prices have risen by nearly 50 per cent this year and it’s estimated Riyadh is making roughly $1 billion daily from sales. It keeps promising to hike output to help reduce prices but obviously has little incentive to fulfil that pledge. Also, OPEC is no longer the muscular force it once was with divisions between the Iranians and Saudis and oil also coming from countries like Russia and Norway.

Under normal circumstances, China would have been out there far in front of India as a buyer of Russian oil. After all, Russia is right next door and the Chinese were already big buyers of Russian oil. But Chinese demand has been more muted than might have been expected. That’s partly due to April’s lockdowns in 23 cities, including Shanghai and Beijing, that squeezed consumption. Demand fell in China from 14 million bpd to 13 million at the peak of the lockdowns.

Also, Katona reckons Chinese companies being state-owned are less driven by the profit motive than Indian companies and they didn’t leap into the market when the most lucrative deals were on offer. “There’s a different dynamic. India has much more of a private-enterprise culture,” he says.

Chinese firms have now jumped back into the market and established their position firmly as the biggest buyers of Russian oil. What about the future? Oil prices could rise again by July, says Katona. In fact, he believes the current dip is temporary and oil prices could shoot up as high as $135 next month.

Other oil industry analysts also expect oil prices to climb again in coming months, though they add they might start falling as the world economy begins feeling the brunt of different negative economic forces. “For the moment, disruptions to oil supply are taking a back seat to concerns of weaker demand” but “the fundamental picture remains one of tightness,” analysts from financial services firm ANZ say.

Depending on the situation, India’s buying from Russia could even climb to 1.5 million bpd. But that’s probably looking too far into the future in a very uncertain world. For now, India’s refiners are in a great place and peace is the only threat to them.