Craig Mellow, Barron’s

MIAMI
EnergiesNet.com 01 28 2023

There are no winners in Vladimir Putin’s war in Ukraine as it grinds toward its second year, except maybe India.

The soon-to-be most populous nation has increased its imports of Russian crude oil 33-fold since Putin invaded his neighbor last February, to more than one million barrels a day.

It’s getting a bargain. Russia’s Urals crude blend is selling at around a 30% discount to global benchmark Brent, $22 on every barrel at today’s price, says Hunter Kornfeind, an oil market analyst at Rapidan Energy Group. That spread was more like 5% before the war.

That’s not all. India imports nearly 90% of its crude oil but is rich in refining capacity. Refiners are gobbling cheap Russian crude for re-export as diesel fuel and other products, at healthy mark-ups.

Demand for this trade should leap on Feb. 5, when the European Union adds an embargo on importing Russian refined products to the one it slapped on Russian crude in December.

“India could become the de facto refinery for Europe,” says Venkat Pasupuleti, co-portfolio manager for India at Dalton Investments.

One of the biggest oil-products exporters happens to be India’s largest publicly traded company, Reliance Industries (500325.India).

Before you rush to buy Reliance stock, there are a few complications. Indian Prime Minister Narendra Modi has so far kept all sides of a geopolitical conflict happy, with some luck from the market. When the EU stopped importing Russian crude last month, the Western allies imposed a price cap for the rest of the world of $60 a barrel for Urals.

The luck may be running out. Oil has climbed 12% since then on hopes of a China reopening. That brings even Brent crude’s continuous contract minus 30% to $62, a level that should trigger a raft of EU/U.S. insurance and financial sanctions.

That 30% discount may be overestimated, says Sergey Vakulenko, who before the Ukraine invasion was head of strategy at Russian oil producer Gazprom Neft.

“Anecdotal reports” indicate Indian refiners’ real discount is $10 a barrel at most, he says. Shipping costs and middlemen eat up the rest of the reported differential.

Modi’s government threw a wet blanket on Reliance Industries shares in July, imposing a windfall tax on oil-products exports. That shaved $488 million off the conglomerate’s profit the following quarter. Reliance stock trades about where it did a year ago, with plenty of volatility in between.

Modi wasn’t just out to punish Reliance. India, which is looking to seize the global growth baton from China, needs its oil products at home. Petroleum demand was on track to surge by 400,000 barrels a day, or 8%, last year.

Analysts project another 200,000-barrel increase for 2023. Unchecked exports could push domestic fuel prices out of control.

India just assumed the presidency of the G20 group of leading economies, a spotlight Modi might rather do without as he tries to straddle Russia and the West, and profit from both.

All the same, a faraway war has landed oil-deprived India in an unexpected sweet spot. As of today, the EU is still importing some one million barrels a day of Russian oil products, Kornfeind reports.

Moscow can’t just shift those exports, like crude, to India and China. They don’t need them. Europe is bound to scramble to replace the imports, with India the first obvious place to look.

Modi can keep playing both sides against the middle, carefully.

marketwatch.com 27 01 2023