Russian President Vladimir Putin (R) talks with Indian Prime Minister Narendra Modi (L) during a visit to the Zvezda shipyard, as they are accompanied by the CEO of Russian oil giant Rosneft Igor Sechin (R), outside the far-eastern Russian port of Vladivostok September 4, 2019, ahead of the start of the Eastern economic forum hosted by Russia.
Aleksandar Nemenov | Afp | Getty Images
The days of India buying cheap Russian oil may be over.
Widespread US sanctions against Russian energy companies and oil tanker operators will complicate India’s efforts to continue importing cheap Russian crude and could fuel inflation in Asia’s third-largest economy, analysts said.
The country could be at risk of an oil shock, said Bob McNally, president of Rapidan Energy Group.
“India will be more affected by the sanctions than China, as India imports a much larger amount of its oil from Russia than from China,” he told CNBC.
last friday, The US Department of Finance announced sanctions against two Russian oil producersalong with 183 ships that were primarily oil tankers carrying barrels of Russian crude oil. Currently, the tankers are still under US sanctions allowed to unload crude oil until March 12.
South Asian nation imported a significant 88% of its oil needs between April and November 2024 was little changed from the previous year, according to government data. About 40% of those imports come from Russia, according to trade intelligence firm Kpler.
Of the 183 tankers recently sanctioned, 75 have transported Russian oil to India in the past, according to Kpler data. Last year alone, 183 sanctioned tankers transported around 687 million barrels of crude oil, of which 30% was delivered to India.
“Most of those barrels went to Indian refineries and so the impact is likely to be the biggest there,” said Aldo Spanier, senior commodities strategist at BNP Paribas in a post-sanctions research note.
The new U.S. sanctions were deeper and broader than markets had anticipated, and disruptions are expected to intensify, Spanier added.
India’s Ministry of Petroleum and Natural Gas did not respond to CNBC’s request for comment.
Oil prices from year to year
Sanctions also come at a time when India will surpass China as the largest consumer of oil in the world in 2025, with a share of 25% in total global oil consumption.
Increased demand for transportation fuels and household cooking fuel should drive this growth of 330,000 barrels per day this year – the most of any country, the U.S. forecast the Directorate for Energy Information showed.
India consumed 5.3 million barrels per day in 2023, the latest EIA data showed. This consumption is expected to increase by 220,000 barrels per day last year.
India was not always so dependent on Russian oil.
Until 2021, Russian oil accounted for only 12% of the volume of oil imports from India. By 2024, that share has jumped to 37.6%, Muyu Xu, senior oil analyst at Kpler, told CNBC.
The catalyst for increased oil imports was the war in Ukraine, which prompted some Western countries to impose sanctions on Russia and limit purchases of Russian crude oil. As Russian oil prices fell, India was able to get supplies cheaply from non-sanctioned companies.
The decline in Russian Urals crude against global benchmark Brent averaged about $12 a barrel last August through October, according to S&P Global latest published data last November. In 2024, Russian Urals was also cheaper by $4 per barrel compared to oil from Iraq, one of India’s main sources of crude oil importsKpler data showed.
“If India were to fully comply with US sanctions, we could see a sharp drop in Russian crude oil arrivals in February and potentially in March,” Xu added.
Supply disruptions to India could be as high as 500,000 barrels per day, Rystad Energy senior analyst Viktor Kurilov said by email.
No more cheap alternatives?
While the impact may eventually ease as affected importers try to find alternative suppliers in the Middle East, some industry watchers say relief could still take weeks to months to materialize.
Even then, the price of oil from these alternative sources will not be that cheap. Global benchmark Brent crude recently rose to a five-month high of around $80 a barrel following the sanctions announcement, after a year of weakness due to oversupply and weak demand.
Prices of Middle Eastern crude oil, which is among India’s alternatives, also rose this week, data released by Kpler showed.
“Depending on how quickly Russia resolves its logistical challenges and how cooperative India and China remain with sanctions, oil prices could jump for several weeks,” Kpler’s Xu said.
Additionally, as Donald Trump’s inauguration approaches, the world’s supply of cheap Iranian crude also faces the risk of tougher sanctions. Iran accounted for 4% of world oil production 2023, according to an EIA report released last year.
“It’s (also) a double whammy for a key importer (India) as Iran is likely to face new sanctions pressure with the incoming Trump administration,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told CNBC.
If the new sanctions are complemented by a potential cap on Iranian crude oil, Brent prices could rise further to $90 a barrel, Goldman Sachs wrote in a note released after the sanctions were announced.
Pain point of Indian economy
The Indian economy is “significantly sensitive” to oil price fluctuations, was determined by a research paper published in 2023. Domestic retail prices of petrol and diesel are rising “like rockets” in response to rising crude oil prices, Abdhut Deheri, assistant professor of economics at the Vellore Institute of Technology, and M. Ramachandran of Pondicherry University’s Department of Economics said in a research paper.
A 2019 Reserve Bank of India analysis found that every $10 per barrel rise in oil prices could lead to an increase in total inflation of 0.4%..
“High oil prices, if passed on to consumers, could further hurt their purchasing power at a time when incomes and GDP growth have slowed,” Dhiraj Nim, an economist at ANZ.
However, weak consumer demand could dissuade manufacturers from passing on the cost burden to consumers, meaning it could instead reduce company profits, Nim added. Even if the government decided to take on the additional costs, it would put a strain on its finances.
Not only will China and India have to pay more for the oil they consume, they will have to pay more to deliver it to their shores as oil tanker prices have also risen, said Andy Lipow, president of energy consultancy Lipow Oil Associates.
Combined with a stronger US dollar and a weaker rupee, the impact on the Indian economy will be magnified, Lipow said.
The Indian rupee recently fell to record lows as a result the pressure of the strong US dollar and the selling of foreign portfolio investors.
This country is no stranger to protests due to high fuel prices. In 2018 widespread protests across the country against record high gasoline and diesel prices led to the closure of businesses and schools in several regions.