Russian oil exports to China have reached unprecedented discounts, in an attempt by sellers to maintain trade flows in the face of falling Indian demand. This dynamic reflects a strategic adjustment following the recent trade rapprochement between India and the United States, which calls into question the future volume of Russian crude purchases by New Delhi.
The announcement of a new pact between the US administration and the Indian government includes the intention to suspend imports of Russian oil, although operational details are still unknown. In view of this possibility, the flow of Russian crude oil has begun to be redirected towards China, which already represents Moscow’s main customer in the midst of isolation due to international sanctions.
Russian crude oil prices seek to support Asian market
ESPO crude, exported from the port of Kozmino, is now offered at a discount of up to 9 dollars compared to Brent, a discount higher than the average of the last few months. For its part, Urals crude usually destined for India is traded at discounts of close to 12 dollars per barrel. This strategy seeks to make Russian oil more competitive with other Asian and Persian Gulf blends. Persian Gulf.
The so-called “teapots” – independent refineries located mainly in Shandong province – have absorbed much of the Russian crude displaced by the contraction in Indian demand. This behavior has been facilitated by the withdrawal of Chinese state-owned oil majors from offshore purchases, following the US sanctions imposed on Rosneft and Lukoil.
China as a key customer but with limits
According to a recent recent analysis by KplerAccording to a recent Kpler analysis, the oil trade between Russia and China is being sustained in large part by a shadow fleet dedicated to the transportation of sanctioned crude oil. This fleet has allowed high export volumes to be maintained despite international restrictions. However, Kpler warns that if India completely abandons the market and major Chinese refiners do not resume purchases, transportation and storage logistics could quickly become saturated.
Despite the sharp increase in Chinese imports, with a record 1.7 million barrels per day in January according to Kpler, analysts warn that the teapots do not have indefinite capacity to continue increasing their purchases. If the participation of large state-owned companies is not reactivated, Russian surpluses could end up in floating storage, putting further pressure on international prices.
The boom in heavily discounted Russian barrels is generating direct competition with crudes from the Middle East and other regions, putting downward pressure on refining differentials and margins in Asia. In this context, decisions by India and China will have a direct impact on the balance of physical markets for oil markets in the coming months.
Source and photo: Reuters