With the flagship Russian crude Urals breaching the G7 price cap of $60 per barrel, there is a risk of Moscow’s oil, at least partially, becoming inaccessible for Indian refiners. It could become a headache for India as Russian oil now accounts for over 40 per cent of its oil imports.
Toril Bosoni, Head of the Oil Markets Division at the Paris-based International Energy Agency (IEA) emphasizes that while India is reliant on Russian oil, Russia is heavily dependent on Indian refiners as well. In case Russian oil indeed becomes unviable for Indian refiners, she believes that the “logical alternative” would be to turn to its traditional suppliers in West Asia.
In an interaction with Sukalp Sharma, Bosoni talks about the current dynamics of global oil markets and their impact on India, oil demand outlook going ahead, and the likely effect of natural gas, renewables, and future fuels like green hydrogen on the evolution of the energy landscape globally. Edited excerpts:
Crude oil prices matter a lot to India as the country is heavily dependent on oil imports. What do you make of the current demand-supply scenario in the international oil market and its impact on prices in the near term?
So far this year, the oil markets have been relatively balanced despite a number of production cuts from OPEC (Organization of the Petroleum Exporting Countries) nations. Since last October when those cuts were first put in place, we have seen increased supplies from other producers. We have seen higher production from the United States, Iran, and a number of other producers. So, the 2 million barrels a day cut (by OPEC+ countries) has been offset. In June, for instance, compared to last October, oil production was roughly the same.
Now, we see that there are additional voluntary production cuts taking effect this month, primarily led by Saudi Arabia, but also Russia has said it would reduce exports. And this is coming at a time when we normally see demand rising seasonally. We are still seeing demand rising structurally as we have recovered from the pandemic with growth in China and opening up of global aviation. So, we are still seeing strong growth and we are also seeing demand rising seasonally. And we see limited potential of supplies increasing from other sources. So, the market to us looks set to tighten quite significantly, which will obviously have an impact on prices. Now, some of the production cuts are voluntary and it is a question then to balance supply with the demand to avoid a significantly tighter market.
Russian crude now accounts for over 40 per cent of India’s oil import volumes, which reflects a high level of dependency. Urals recently breached the G7 price cap of $60 per barrel. If Russian supply, even partially, goes out of market for India, do you think there are enough alternate sources of supply that could swiftly replace Russian volumes?
Because of the tightening crude market globally, and especially the sour crude market–the production cuts that we have seen from OPEC countries is primarily in heavy sour crude–Ural’s benchmark and other sour crude benchmarks are being pushed higher. This is clearly having an impact. Now, quite a large portion of Russian crude is already trading using tankers that are not linked to EU (European Union) maritime services and insurance. But there are still some trades that are being done by EU maritime services. So, with Urals going above the $60 a barrel, it is a risk for companies that continue to do those trades.
So, if you see a loss of volumes, and as I said before, we are not seeing additional supplies from other producers, the logical alternative for India would be the OPEC Middle Eastern countries. They have recently cut production, so they have the ability to increase production if demand is there. So, if we lose more Russian supply than what is expected, other major producers will have the option to reverse some of the production cuts.
But don’t forget that India and China combined take up 80% of the Russian crude oil and there are very few other countries to take it. So, I would say that while India may be reliant on Russia for crude oil, Russia is heavily reliant on India and China to place its barrels. It remains to be seen what Russia plans to do in this situation. Where else can Russia sell if no one else is willing to buy?
Global oil demand peak is likely in a few years’ time, whereas for India, the demand is expected to continue growing. How should we interpret this contradiction between the trends in global oil demand and India’s oil demand?
When we look at the different projections for different countries, we have to stop and think where they are coming from. For instance, China has gone through a very explosive phase for many years. But now China’s population is shrinking. This is not the case for India. China’s economy is shifting from a very manufacturing driven, industrial driven economy to the service sector. China is putting a lot of policies on electric vehicles, they want to be a leader in clean energy technologies and scaling of these. But India is coming from a different place. India’s economy and population are still growing. India is doing a lot of things to scale up. India’s efforts in bringing electricity to its entire population have been very impressive. But there are still many people in India who don’t have access to a lot of energy at affordable prices. So, I think, it is not fair to compare one country to another and say they should be the same.
The Indian government has been pushing natural gas as a transition fuel. There is also a strong impetus on biofuels and renewable energy. What kind of an impact do you see on India’s oil demand?
Our projection is that India’s demand for both crude oil and petroleum products will continue to increase. The economy is growing very strongly, the population is increasing, and energy, oil demand per capita is still very low. So, there is a big scope for increase.
Now, how the balance would be, with the push by the government to switch part of the transportation fuels into gas and also biofuels, will obviously have an impact on oil demand. But in general, we see a demand for all energy sources in India going really strong for some time. There is also a very strong push for clean energy technologies in India, with major investments in solar, wind, and others. Every country has to find its own transition pathway depending on where it is starting and under what circumstances. For India, there is clearly space for all of the energy sources.
There is a lot of talk in India and globally about future fuels, particularly green hydrogen and ammonia, among others. How do you see the energy landscape evolving with such fuels going ahead?
Not just in India, but at the global level, given the ambitions to reach net-zero emissions by 2050 or 2060 or 2070, I think it is inevitable that these new fuels would be part of the solution. We will continue to need energy. We need to find cleaner energy. It is not the energy that is the problem, it is the emissions. For continuing use of the existing fossil fuels, we need to be able to capture the carbon, we need to reduce methane flaring, and a lot of other things.
These new fuels like green hydrogen and ammonia, sustainable aviation fuels, e-fuels for maritime shipping, will certainly be part of the solution. Now, the same solution may not fit every country or every sector of the industry. I think we will see a combination of all kinds of fuels and we are going to see all of these coming into the market. And there will be a big push to improve the economics of these new fuels, to scale up production and bring down costs, as we have seen for solar power. Solar is now the cheapest source of power generation globally. There is a big push by governments and companies that facilitate it. It remains to be seen if all of the new fuels would succeed. But there are a lot of efforts going on in India and elsewhere, which is quite encouraging.