By Irina Slav
- The war in Ukraine has forced the West to target Russian energy exports.
- Russia has instead offered its crude oil at massive discounts to India and China.
- Russia became China’s largest oil supplier earlier this year, according to Chinese customs data for May, overtaking its OPEC+ partner Saudi Arabia.
When the UK and the U.S. banned Russian oil imports, and the European Union approved sanctions that made it a lot harder to trade in Russian oil, media reports highlighted the argument that Russian could not possibly replace Europe with Asia as its biggest oil client.
What wasn’t so widely reported on was China and India’s dependence on imported oil, any imported oil compatible with their refinery setups, and how important prices were for both, given their size and import dependence. And both countries certainly took advantage of Western sanctions.
Russian crude has been trading at a discount to global benchmarks since March. This discount has been a boon for buyers in China and India. The Wall Street Journal recently reported, for example, that China’s Sinopec posted strong financial figures for its first quarter, at least in part thanks to cheap Russian oil.
Meanwhile, Russia became China’s largest oil supplier earlier this year, according to Chinese customs data for May, overtaking its OPEC+ partner Saudi Arabia. It also overtook Saudi in India because of the discount at which Russian crude now sells.
Speaking of that discount, it has been shrinking in the past few weeks, suggesting that demand from China and India has been strong enough to keep Russian oil flowing abroad in large enough volumes to keep the oil revenue flowing back into Russia.
Bloomberg reported last week that there was a dip in these oil flows in the week to August 12, with the total amount of Russian oil sent to Asian buyers falling to the lowest since March, after plateauing at around 2 million bpd between April and June, the report noted.
Even so, the discount of ESPO crude sold to Asia, which was as deep as $20 per barrel in March, has vanished, with at least two cargos set to load next month and in September selling at parity with the Dubai benchmark, per a Reuters report.
The shrinking of the discount of Russian oil could be one reason for the decline in volumes going to Asia. Another could be that the stocking up on cheap crude from Russia has been going well both in India and China.
Reuters’ Clyde Russell suggested in a recent column that this redirection of Russian oil flows makes Russia “increasingly reliant on just two countries when it comes to selling its crude oil.” India and China now account for more than 40 percent of Russian exports, he noted, up from half that a year ago.
The thing is that this reliance is mutual. The big Asian powerhouses need cheap energy to remain big Asian powerhouses. China has been Russia’s biggest oil buyer for years. And Russia needs new markets for its crude, especially after the EU embargo comes into effect at the end of this year.
Once this embargo comes into effect, global oil prices, bar an Iran nuclear deal, will jump sharply. And China and India, along with smaller buyers such as Turkey, Egypt, and even troubled Sri Lanka, will be the winners, keeping their access to Russian crude at preferential prices.
The WSJ report noted that if an oil buyers’ cartel comes into existence, it would also benefit Chinese and Indian oil buyers as neither country has joined G7’s initiative for this cartel. It may be a good thing that the chances of such a cartel materializing are quite slim.
No wonder the International Energy Agency said earlier this month Western sanctions had had a limited effect on Russian oil production, noting that in July, Russian crude output was only 310,000 bpd below its levels before the Ukraine invasion. It also revised upwards its forecast for production next year.