India’s Cheap Russian Oil Days May Be Numbered
New US Sanctions Complicate India’s Oil Imports
India’s economy is bracing for a potential oil shock as sweeping US sanctions on Russian energy companies and vessels transporting oil threaten to disrupt the country’s cheap oil imports from Russia. Analysts warn that this could lead to higher inflation in Asia’s third-largest economy.
India’s Dependence on Russian Oil
India has become increasingly reliant on Russian oil, with 40% of its oil imports coming from Russia between April and November 2024. The country imported a significant 88% of its oil needs during this period, with little change from the previous year. The sanctioned tankers have transported around 687 million barrels of crude, with 30% shipped to India.
Impact on Indian Refiners
The sanctions are expected to have the largest impact on Indian refiners, who have been relying on cheap Russian oil. “Most of these barrels went to Indian refiners, and hence, the impact will likely be largest there,” said BNP Paribas’ senior commodities strategist Aldo Spanier.
India’s Growing Oil Demand
India is set to surpass China as the number one oil consumer in the world in 2025, accounting for 25% of total oil consumption growth globally. Increasing demand for transportation fuels and home cooking fuels is driving this growth, with forecasts suggesting an increase of 330,000 barrels per day this year.
Rise in Oil Prices
The sanctions have already led to a surge in oil prices, with Brent advancing to a five-month high of around $80 per barrel. Prices of Middle Eastern crude, which are amongst India’s alternatives, have also risen. “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,” said Kpler’s Muyu Xu.
Double Whammy for India
The situation is further complicated by the risk of tighter sanctions on Iranian crude, which could lead to even higher oil prices. “It is a bit of a double whammy for the key importer [India] as Iran will likely face new sanctions pressure with the incoming Trump administration,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
Vulnerability to Oil Price Fluctuations
The Indian economy is significantly vulnerable to fluctuations in oil prices, with domestic retail prices of gasoline and diesel surging in response to rising crude oil prices. Every $10 per barrel rise in oil prices could lead to a 0.4% increase in headline inflation.
Impact on Consumers and Companies
High oil prices, if passed to consumers, could further hurt their purchasing power at a time when income and GDP growth have slowed. However, weak consumer demand could deter producers from passing on the cost burden to consumers, which means it could dent companies’ profits instead. If the government chooses to shoulder the additional costs, it would strain its finances.
Ripple Effects on the Economy
The impact on the India economy will be magnified by a stronger US dollar and weaker rupee. India’s rupee recently plunged to a record low as a result of pressure from a strong greenback and selling by foreign portfolio investors. The country is no stranger to protests over high fuel prices, and the current situation could lead to widespread unrest.
Leave a Reply