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 oil, exported from the port of Kozmino, is now being offered at a discount of up to $9 per barrel compared to Brent crude, which is higher than the average discount in recent months. Meanwhile, Urals crude oil, which is usually exported to India, is being traded at a discount of around $12 per barrel. This strategy aims to make Russian oil more competitive compared to other Asian and Persian Gulf blends.
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 analysis by Kpler, oil trade between Russia and China is being largely sustained by a shadow fleet dedicated to transporting sanctioned crude oil. This fleet has allowed export volumes to remain high despite international restrictions. However, Kpler warns that if India completely abandons the market and large Chinese refineries do not resume purchases, transport 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 surge in heavily discounted Russian barrels is creating direct competition with crude from the Middle East and other regions, putting downward pressure on spreads and refining margins in Asia. In this context, decisions by India and China will have a direct impact on the balance of physical oil markets in the coming months.
Source and photo: Reuters