Despite the fact that Russian oil is trading well above the G7 cap of $60 per barrel, India continues to lap it up. It has now become the top buyer of seaborne Russian oil and argues that it will continue to do so; i.e., buy the cheapest oil to prioritize energy security.
The G7 Oil Cap
In December 2022, a group of 7 countries settled on the maximum price per barrel of Russian crude oil: $60. The agreement was such that buyers could pay more to obtain it, but they would lose certain essential services. This would enable Russian oil to flow continuously, while also decreasing Moscow’s revenue by pressuring it to accept the lowered rate.
China is now seeing a reduced intake of Russian oil, whereas India’s consumption is only rising. As of now, India is currently purchasing the crude oil at $80 per barrel, which is $20 above the G7 cap.
Why Russian oil?
Brent Crude, the most traded of all of the oil benchmarks, has recently seen a resurgence in price. It is now trading at $95 per barrel, which is dismal news for not only India but all developing countries.
As the third-biggest buyer of oil, India cannot afford this at the brink of a global recession. And, as mentioned earlier, the nation’s stance has always been that it will buy any cheaper oil. In September, Russia supplied 1.57 million barrels to India. This placed the Kremlin’s share in Indian crude imports at 38 per cent, a 5 per cent increase from August.
In September, Turkey was the second biggest buyer of Urals, followed by China and Bulgaria.
The reason Russian oil has been trading above the Western cap is due to the production restrictions implemented by the Organisation of Petroleum Exporting Countries, also known as OPEC.
India’s Falling Rupee
Due to several geopolitical developments, the global economy has been staring down the barrel of probable recession. A resurgent crude like the Brent could prove fatal for central banker’s jobs, amongst many other problems. If the Brent gets any more expensive, it could lead to a rise in the value of the US Dollar. With the Rupee steadily losing its value against the Dollar, such a situation would be nightmare fuel for the Reserve Bank of India.
Furthermore, Brent’s price also affects India’s current account deficit (CAD). To buy crude, large payments have to be made in dollars. The rupee hence takes a hit. All of this combined has pushed India into a tight spot, as alluded to by RBI Governor Shaktikanta Das & co.. The CAD soared to 9.2 billion dollars during the April-June quarter.
Additionally, India had been buying Russian oil at heavy discounts for most of 2022 and 2023. Those discounts are now weakening, with Russia’s flagship oil Urals creeping closer and closer to the Brent in price. Urals, which used to trade $40 below the Brent, is now selling at just $10 per barrel.
