Domestic refiners turned towards Iraq in January 2024 lifting its crude oil exports to India to a record high as US sanctions on firms shipping Russian crude limited vessels supply, which was coupled by some panic buying due to the continuing stand-off between Western nations and Houthi rebels in the Red sea.

While Kpler pegged Iraqi cargoes to India at around 1.30 million barrels per day (mb/d) in January 2024 terming it as the “highest ever”, Vortexa puts the volume at 1.11 mb/d, the “highest since April 2022”.

Both the leading energy intelligence firms and trade sources indicated that Indian refiners turned towards traditional suppliers in the Middle East, such as Iraq, as freight charges are inching up due to limited supply of ships ferrying Russian crude and attacks in the Red Sea making transporters opt for the Cape of Good Hope, which increases voyage time by 10-14 days thereby increasing costs.

Also read: Red Sea worries cause spike in refined fuel prices, but market will adjust

Another factor making Middle Eastern cargoes more attractive is the narrowing of discounts on Russian crude oil compared to similar Middle Eastern grades. For instance, Basrah prices in December 2023 averaged at $76.96 a barrel on a provisional basis compared to $82.82 per barrel in November and $87.58 in October. Oil marketing company sources said that discounts have been stable but have moderated compared to July-September 2023.

Advantage Middle East

“Indian buyers have been having a mixed January when robust domestic demand and a lack of refinery turnarounds have been sapped by panic buying as the Red Sea disruptions complicated the country’s import options. With freight from the Atlantic Basin being prohibitively expensive again, Indian refiners needed to turn towards options closer to home, leading to the highest ever Iraqi crude imports,” Viktor Katona, Kpler’s Lead Crude Analyst, told businessline.

Vortexa’s Head of APAC Analysis, Serena Huang, also pointed out that importing Russian crude has become increasingly challenging for Indian refiners with the US sanctions on two shipping companies that were heavily involved in shipping Russian crude, thereby reducing vessel supply in the near-term and pushing up freight premiums for shipping of Russian crude to India.

“Recent Red Sea attacks have also heightened risks of transiting through the Suez Canal and shipowners may consider taking the longer Cape of Good Hope, which will further add to freight costs. As discounts of Russian crude narrow against Middle Eastern crude, I would not be surprised to see Indian refiners increasing imports of Middle Eastern crude in the months ahead,” she added.

Also read: Demand destruction could ease pressure on global commodities despite Red Sea crisis: Analysts

Huang explained that Basrah Medium’s price competitiveness against other medium-sour grades has supported its popularity.

“India’s crude import appetite, which is largely dictated by its domestic and export demand, coupled with the price competitiveness of Middle East crude relative to other suppliers will dictate the momentum of India’s crude imports from the Middle East,” she emphasised.

Shipping dynamics

Indian government and OMCs have said that so far shipments of crude oil passing through the Red Sea have not been a “cause to worry”, but it is being “closely watched” as the situation is “complex and highly dynamic” post the Hamas-Israel conflict.

According to JM Financial, the risk of global oil supply disruptions due to the Middle East conflict remains elevated, particularly for oil flows via the Red Sea. In CY 2023, roughly 10 per cent of the world’s seaborne oil trade, or around 7.2 mb/d, of crude and oil products and 8 per cent of global LNG trade passed through the Red Sea, the shortest route from Asia to Europe via Suez Canal.

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Main alternative shipping route around Africa’s Cape of Good Hope extends voyages by up to 2 weeks putting pressure on global supply chains and increasing freight and insurance costs. For instance, a ship carrying crude oil from Rotterdam to Singapore, passing through the Suez Canal and Red Sea, roughly travels 8,500 nautical miles (NM) taking 26 days, while journey through the Cape of Good Hope takes 36 days to travel some 11,800 NM.