The move augurs well for India as any cut in output would have led to an immediate spike in oil prices and erase relief from the recent slide. Though it is early days, industry watchers said OPEC appears to have bought the market time to adjust to life after the $60 per barrel cap comes into effect from December 5.
The situation, as it stands now, will hasten the directional change in the flow of oil. The flow of Middle East crude to Europe will rise, making more discounted Russian crude available for India, which has not signed up for the cap. An expected deepening in discounts may not happen as shipping and insurance for Russian oil will become difficult after the cap.
The government has said it will continue to buy Russian crude as it works out cheaper than similar grades of Middle East oil. This is because oil is priced to benchmarks such as North Sea Brent or US West Texas Intermediate. Urals, the most sought after Russian oil, for example, could trade at $15-30 per barrel less than Brent at a given point, depending on market condition.
Indian refiners buy on ‘delivered basis’, where the seller arranges shipping and insurance. That is why the end-discounts are less since part of the differential with Brent pays for these services.
Market analysts said currently, Russian crude was trading below the cap. “If OPEC’s decision leads to further drop in oil prices, the price cap will widen the differential between Russian crude and Brent to the advantage of India,” one oil company executive said, requesting anonymity.
Russian crude currently accounts for 12-15% of India’s oil imports, whereas it was less than 1% before Russia’s invasion of Ukraine in February.
He said there could be some initial hitch in shipping and insurance as about 60% seaborne oil moves in European company-owned vessels. “But trust the shipping industry to work around troubled waters as in the case of Iranian or Venezuelan oil,” he said.
The market may not move much because of the price cap now that OPEC has left production levels unchanged. “Europe had largely stopped buying seaborne Russian oil. So that oil is already flowing elsewhere, mostly India, China and Turkey. It will, however, be interesting to see how refined product prices fare,” he said.