Brent crude again breached the $90 per barrel mark at the start of September 2023, after a period of almost nine months. With this, the gap between international benchmark Brent crude prices and Urals, the flagship Russian crude, has widened for Indian refiners as Russian crude can be sourced within the G7 price cap of $60 per barrel, said rating agency firm CareEdge Ratings in its latest report.
Urals crude had previously remained mostly below the G7's price cap of $60 per barrel. However, recent weeks have seen Urals prices surge, reaching around $69 per barrel.
According to the Care Ratings, this surge in Urals prices has had a direct impact on the share of Russian crude within India's overall crude oil sourcing mix. In August 2023, this share dipped to 34%, down from nearly 40% recorded since the onset of the Russia-Ukraine conflict.
The recent decision by Saudi Arabia and Russia to jointly reduce their daily crude oil production by 10 lakh barrels by December 2023 suggests that a significant drop in crude oil prices is unlikely in the near future, given the stable demand outlook.
In this backdrop, the rating agency said that the Indian refiners, which are the key beneficiaries of cheaper Russian crude, should still be able to clock gross refining margins (GRMs) of around $9–10 per barrel in FY24, as the likely decline in their margins on processing Brent crude is expected to be offset by the significant expansion in margins on processing Russian crude, which can even balance out the potential decline in supply of Russian crude in the near term.
Also, with the onset of winter in Western countries, cracks for refined products are expected to improve from the existing levels, further helping the GRMs of Indian refiners, it noted.
India relies on imports for nearly 85% of its total crude oil needs. Russia's contribution to India's import portfolio was less than 2% before the outbreak of the Russia-Ukraine war. However, the geopolitical dynamics stemming from this conflict led to a significant increase in the share of cost-effective Russian crude oil in India's overall crude oil supply.
Throughout FY23, the proportion of Russian crude gradually rose in India's total sourcing mix, reaching nearly 40% by March 2023. For the entire fiscal year 2023, Russian crude accounted for almost one-fifth of India’s total crude oil imports, said the rating agency.
In February 2023, the G-7 nations enforced a price cap of $60 per barrel on Russian crude, while Brent crude prices were hovering around approximately $83 per barrel. The subsequent easing of Brent crude prices helped to maintain stable volumes of Russian crude oil supply to India until July 2023.
However, in August 2023, there was a sharp increase in crude oil prices due to production cuts announced by Saudi Arabia and Russia, while demand prospects remained steady. This, according to CareEdge Ratings, resulted in a widening gap between international benchmark Brent crude prices and the price-capped Russian crude.
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