India Faces Potential Oil Shock as U.S. Sanctions on Russian Crude Take Effect

India is currently confronting the prospect of a significant oil shock following recent U.S. sanctions aimed at Russia's oil industry. The U.S. has imposed extensive sanctions on Russian energy firms and the vessels that transport its oil, which poses challenges for India’s attempts to maintain its imports of relatively inexpensive Russian crude oil.

As analysts have pointed out, these sanctions could lead to increased inflation pressures in Asia's third-largest economy. According to Bob McNally, president of Rapidan Energy Group, "India will be more affected than China by sanctions since India imports a much larger quantity of its oil from Russia than China does."

Last Friday, the U.S. Treasury announced sanctions against two Russian oil producers and 183 vessels, primarily oil tankers involved in shipping Russian crude. While these sanctioned tankers can still offload crude oil until March 12, the restrictions will run deep.

India's dependence on oil imports is evident, with the country importing about 88% of its oil between April and November 2024, with around 40% of that coming from Russia. This percentage has dramatically climbed from just 12% in 2021. The change has been driven by the fallout from the Ukraine war, which led several Western nations to limit or halt their purchases of Russian oil. Consequently, India capitalized on the opportunity to acquire crude oil at discount prices.

Data from the trade intelligence firm Kpler reveals that the newly sanctioned tankers have previously delivered Russian oil to India. In fact, these vessels transported approximately 30% of their total shipments to Indian refiners. BNP Paribas' senior commodities strategist Aldo Spanier emphasized this, indicating that the impact is likely to be most felt in India due to its high volume of Russian oil imports.

As the U.S. sanctions unfold, India's Ministry of Petroleum and Natural Gas has yet to comment on the situation publicly. This development comes at a crucial time as India is projected to surpass China as the world's largest oil consumer by 2025, which would account for roughly 25% of global oil consumption growth.

The demand for both transportation and home cooking fuels is expected to significantly contribute to this growth, with predictions indicating an increase of about 330,000 barrels per day this year, based on forecasts from the U.S. Energy Information Administration. India's total oil consumption stood at 5.3 million barrels per day in 2023, with further increases expected in the coming years.

With regards to pricing, the sanctions will likely lead to higher oil prices. The benchmark crude price, Brent, recently increased to around $80 per barrel, influenced by the new sanctions after a prolonged period of low prices due to oversupply and weak demand. This shift implies that alternative oil supplies from other regions like the Middle East will not necessarily be cheaper than Russian crude has been in recent times.

However, some analysts anticipate that the resulting disruptions in supply could lead to a potential drop in arrivals of Russian crude oil to India, with weekly disruptions estimated at around 500,000 barrels per day. This potential supply issue could trigger spikes in oil prices over the short term.

Implications for the Indian Economy

India's economy is already known to be sensitive to fluctuations in oil prices. A research paper published in 2023 highlighted how retail prices for gasoline and diesel tend to rise sharply when crude prices increase. Analyses have shown that a $10 increase in oil prices can lead to a roughly 0.4% spike in overall inflation in India.

If consumers shoulder the increased costs, it could restrict purchasing power at a time when economic growth is stagnating. In another possible scenario, weak consumer demand could hinder producers from passing the costs onto consumers, thereby squeezing profit margins for companies instead. This situation places the government in a precarious position should it decide to bear the rising costs, potentially straining public finances.

As oil prices rise, delivery costs will also increase, compounded by rising tanker rates and a fluctuating currency. The Indian rupee has been under pressure, recently hitting a record low against the U.S. dollar, made worse by selling from foreign portfolio investors.

The country's history with fuel price hikes shows that increased costs can lead to social unrest. In 2018, widespread protests erupted over soaring petrol and diesel prices, disrupting daily life and affecting businesses across various regions.

India, Oil, Sanctions