Indian refiners eye windfall from Urals oil drop: Will motorists benefit?

Indian refiners may face a windfall this year from falling Urals oil rates even as US levies sanctions on Russian firms. Will motorists benefit?

European benchmark Brent climbed by 3 per cent this year to above $77 a barrel in response to a harsh northern hemisphere winter and prospects of new US sanctions. This may worry Indian policymakers, who would probably be burning the midnight oil to prepare India's Union Budget for 2025-26. But the uptick in crude oil prices may well be a smokescreen.    

Moving forward, Indian refiners could be staring at huge savings from cheap Russian oil, though whether state oil marketing companies will let motorists share in the largesse by way of lower pump prices is uncertain. 

The prognosis is based on price forecasts for Russian crude oil exports. Russian oil companies are concerned that a surge in output from non-Opec nations this year may drive prices of Russian export benchmark Urals to as low as $40 per barrel on a free on board (FoB) basis, which is around $29 a bbl lower than India’s average crude import basket price for 2024-25.   

Opec, or Organization of the Petroleum Exporting Countries, is an intergovernmental organisation of oil-exporting countries that coordinates the petroleum policies of its 12 members. 

India gains from any downgrade in the price of Urals. Urals, a medium, sour crude with a higher sulphur content, is the biggest export for Russia and India’s biggest purchase. Russia supplied 1.78 million bpd of all grades to India in 2024 for a 38 per cent share, of which Urals comprised 28 per cent, or 1.3 million bpd, of all oil imported by India, according to data from market intelligence agency Kpler. In December, Urals accounted for more than four-fifths of all Russian oil shipped to India, reflecting how profitable the trade was to Indian refiners. 

US imposes sanctions 

  The outgoing Biden administration has enforced stringent sanctions on two Russian state-oil companies, key Russian insurers and around 183 tankers  as part of a sweeping sanction overhaul. It is unclear if the incoming Trump administration will reverse the fresh bans. 

But if the bans stay in place, India will have to take a tough call on continuing imports from Russia. If it does, defying Washington again, Russian oil suppliers and traders may have to expand discounts from the existing $3-4 a barrel for Indian refiners to accept the cargoes. In December 2022, when Washington and the European Union imposed price caps on exports of Russian oil, discounts went beyond $35 per barrel because Russia found it hard to find buyers, industry sources say. 

In case New Delhi decides to stay away from buying Russian oil, state-run refiners have to turn to the expensive Gulf crudes and US oil. 

“India continues to import nearly 40 per cent of its imported crude from Russia due to discounted Urals, however discounts have declined over a period of time. Any additional sanctions on Russia could further shrink the available discounts to India,” said Hardik Shah, Director, CareEdge Ratings.  

Brent crude prices have sharply gone up mainly on the back of reports of decline in US inventory, lower production by OPEC members, seasonal growth in demand due to winter, expectation of new sanctions on Russia with change in presidency in the US and other macroeconomic factors, Shah says. 

“I expect Trump to move quickly to de-escalate the Ukraine war situation, but sanctions against Russia will probably be unwound gradually,” said Vandana Hari, Singapore-based oil expert and founder of Vanda Insights. “Urals discounts could shrink, but are unlikely to disappear completely, given that in all probability the buyers will remain limited to China and India.” 

 

 

Indirect subsidy for Indian motorists

  Whichever way the US sanctions play out, Russian oil has become an important part of India’s budgeting because of the sizable discounts offered to Indian refiners, ranging from $3 to $20 a barrel. The current discounts are closer to $3 per barrel. To put it in perspective, Russia was indirectly subsidising Indian motorists, because New Delhi has kept rates of petrol, diesel, and domestic LPG unchanged (barring tax adjustments) since May 2022. Earlier, pump prices moved in line with global fuel rates.  

Prices of Russian crude oil export benchmark Urals could collapse to $45-50 a barrel levels, says Energy Intelligence, a UK-based market intelligence agency, citing a letter written by Russian state oil company Rosneft’s chief Igor Sechin.  

Sechin, in his capacity as Executive Secretary of the Presidential Commission on the development of fuel and energy complex and ecological security, wrote a letter to Russian President Vladimir Putin late last year warning about the risk of a possible decline in prices for Russian oil. As a result of the increased supplies to the world market, Sechin said, prices of Russian oil could drop to $40 a bbl, nearly $30 a bbl lower than what Russia has budgeted for taxation purposes in 2025.  

Rosneft did not reply to an email seeking comments. Urals is currently trading at around $65 a bbl on FOB, at a discount of $12 a bbl to Brent. 

Russian oil delivered to India during January-November 2024 averaged $80 a bbl, compared to $86 a bbl for Saudi Arabian oil, according to Indian customs data. Russian oil averaged $74.8 a bbl in November, compared to $81.4 a bbl for Saudi Arabian crude. Indian refiners have replaced higher-priced Gulf crude oil supplies with Russian oil. 

“The concern for Urals going down to $40-50 appears unwarranted at this point,'' Hari said. “I don't see crude dropping to those levels this year and no reasons for Russian barrels alone to slump to those levels. 

Sizeable impact on Urals

  While Rosneft’s Sechin may have presented a bleak picture to the Kremlin to lobby for lower taxes citing lower revenues, Russian oil exporters still expect a sizable impact on Urals from higher production from non-OPEC nations.  

“We expect global production of liquid fuels will increase in 2025 by more than 1.6 million bpd, with almost 90 per cent of the growth coming from countries outside of OPEC+,” the US Energy Information Administration said last month. That excludes the restoration of a shutdown in OPEC output by around 2.2 million bpd, which is expected to be gradually relaxed this year. 

Oil use by the rich member countries of the Organisation for Economic Co-operation and Development (OECD) is expected to be flat, with only India and China adding a combined 600,000 bpd this year to demand growth. An average oversupply of at least 300,000 bpd this year, after excluding any increase in OPEC production, is likely to keep Brent at lower levels, analysts say. The EIA has forecast Brent at $74 a bbl this year, compared to an average $81 a bbl last year. 

At such levels, Urals — assuming an average $16 a bbl discount to Brent— will drop to around $58 per barrel on FoB basis. That is still $20 a bbl lower than the average Indian crude import basket price for this fiscal. The discounts on Urals to Brent have surged from as low as $2 a bbl in January 2022 to as much as $37 a bbl after Russia invaded Ukraine in February 2022. 

India’s crude oil basket, a cocktail of largely sour grades and some lower sulphur grades used by New Delhi in its Budget calculations, averaged $79 per barrel, excluding transport, in the April-December period of 2024-25. The basket does not seem to include Russian supplies. 

Which finally begs the question: How will Indian pump prices look this year considering the outlook for a drop in the price of Urals.  

Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings at ratings agency ICRA, a US Moody’s affiliate, declined to comment on the price adjustment, but said Indian state-run refiners might incur as much as Rs 40,000 crore in loss of revenues from LPG sales this fiscal — there is no clarity from New Delhi on how they will be compensated. Second, product cracks, or the profits made from processing crude oil to fuels, economics are “not helping,” he added.  

Whatever profitability state-run refiners are seeing is from the cheaper Russian barrels and higher marketing margins, leaving the question open if gains made this year from lower Ural rates will be used by refiners to compensate themselves for losses on LPG or passed on to the Indian motorist.