The United States Treasury has announced stringent sanctions on two Russian oil producers and 183 vessels, primarily oil tankers involved in transporting Russian crude. This development poses a significant threat to India's energy sector, as these tankers carried approximately 687 million barrels of crude last year, with a substantial 30% of that supply directed to India. The sanctions, which are expected to disrupt the oil supply pipeline to India, could lead to potential shortages of up to 500,000 barrels per day. The implications are severe for India, which imported about 40% of its oil needs from Russia in 2023.
India's dependency on Russian oil has grown significantly over recent years. As recently as 2021, Russian oil constituted 12% of India's oil imports by volume. However, with India's oil consumption rising by an estimated 220,000 barrels per day last year, the country finds itself in a precarious position. Analysts warn that India could be facing a potential oil shock, exacerbated by the current geopolitical landscape and the deepening sanctions.
Bob McNally, president of Rapidan Energy Group, emphasized the disproportionate impact on India compared to other nations such as China. He stated, "India will be more affected than China by sanctions, since India imports much greater amount of its oil from Russia than China." This sentiment is echoed by other experts who predict that the sanctions will complicate India's efforts to continue importing affordable Russian crude, potentially driving up inflation in Asia's third-largest economy.
"High oil prices, if passed to consumers, could further hurt their purchasing power at a time when income and GDP growth have slowed," said Dhiraj Nim, an economist at ANZ.
The economic repercussions for India are compounded by currency fluctuations. A stronger U.S. dollar coupled with a weaker Indian rupee is expected to magnify the impact of the sanctions on India's economy. Historical analysis from the Reserve Bank of India suggests that every $10 per barrel increase in oil prices could result in a 0.4% rise in headline inflation.
BNP Paribas' senior commodities strategist Aldo Spanier highlighted the unexpected depth and breadth of the U.S. sanctions, warning that disruptions are likely to intensify. As he noted, "Most of these barrels went to Indian refiners and, hence, the impact will likely be largest there."
"Depending on how quickly Russia resolves its logistical challenges and how cooperative India and China remain with the sanctions, oil prices could spike for a few weeks," commented Xu from Kpler.
Out of the 183 tankers newly sanctioned by the U.S., 75 have previously transported Russian oil to India. With Brent crude recently reaching a five-month high of around $80 per barrel following the announcement of these sanctions, market volatility is expected to persist.
Lipow, an industry expert, pointed out that India's days of sourcing cheap Russian oil might be numbered. The constraints imposed by the sanctions could compel India to seek alternative suppliers at higher costs.
"If India were to fully comply with U.S. sanctions, we could see a sharp decline in Russian crude arrivals in February and potentially March," Xu warned.
Furthermore, Helima Croft from RBC Capital Markets suggested that India faces a "double whammy" scenario. The incoming Trump administration may also impose renewed sanctions on Iran, another key supplier for India.
"If the new sanctions are coupled with a potential curb on Iranian crude, Brent prices could rise even higher to $90 per barrel," according to Goldman Sachs.