Russian President Vladimir Putin (right) talks with Indian Prime Minister Narendra Modi (left) during a visit to the Zvezda shipyard accompanied by the head of Russian oil giant Rosneft Igor Sechin (right) outside the Far Eastern Russian port of Vladivostok on September 4, 2019, before the beginning of the Eastern Economic Forum organized by Russia.
Alexander Nemenov | Af | Getty Images
The days of India buying cheap Russian oil may be over.
Tightening U.S. sanctions on Russian energy companies and oil ship operators will complicate India's efforts to keep imports of cheap Russian oil and could push up inflation in Asia's third-largest economy, analysts say.
The country could be in for a potential oil shock, said Bob McNally, president of Rapidan Energy Group.
“India will be more affected by sanctions than China because India imports much larger volumes of oil from Russia than China,” he told CNBC.
Last Friday, The US Treasury announced sanctions on two Russian oil producersalong with 183 ships, mostly tankers, that were carrying barrels of Russian oil. Currently, tankers sanctioned by the US are still parked permission to unload crude oil until March 12.
A South Asian nation imported a significant 88% of its oil needs According to government data, little changed between April and November 2024 compared to the previous year. According to data from the intelligence company Kpler, about 40% of these imports came from Russia.
According to Kpler's data, of the 183 tankers covered by the new sanctions, 75 have transported Russian oil to India in the past. Last year alone, 183 sanctioned tankers transported approximately 687 million barrels of oil, 30% of which went to India.
“The majority of these barrels have gone to Indian refineries and therefore the impact is likely to be greatest there,” BNP Paribas Senior Strategic Advisor for Raw Materials Aldo Spanier said in a research note after the sanctions were imposed.
The new U.S. sanctions were deeper and broader than markets had anticipated, and disruptions were expected to intensify, Spanier added.
India's Ministry of Petroleum and Natural Gas did not respond to CNBC's request for comment.
Oil prices year on year
Sanctions also come at a time when India is expected to overtake China as the world's largest oil consumer in 2025, accounting for 25% of total global oil consumption growth.
Growing demand for transportation and home fuels will increase by 330,000 barrels a day this year – the most of any country, U.S. forecast The Energy Information Administration showed.
The latest EIA data showed that in 2023, India consumed 5.3 million barrels per day. Consumption is expected to have increased by 220,000 barrels per day in the past year.
India was not always so dependent on Russian oil.
As recently as 2021, Russian crude oil accounted for just 12% of India's total oil imports. By 2024, that share had risen to 37.6%, Muyu Xu, senior oil analyst at Kpler, told CNBC.
The catalyst for the increase in oil imports was the war in Ukraine, which prompted some Western countries to impose sanctions on Russia and limit purchases of Russian oil. When Russian oil prices fell, India managed to obtain supplies cheaply from companies that were not subject to sanctions.
According to S&P Global, the discount of Russian Urals crude to global benchmark Brent averaged about $12 per barrel from August to October recently published data in November last year. In 2024, Russian Urals were also $4 a barrel cheaper compared to oil from Iraq, one of India's main sources of crude oil importsKpler's data showed.
“If India were to fully comply with US sanctions, we could see a sharp decline in Russian oil supplies in February and potentially March,” Xu added.
Supply disruptions to India could reach up to 500,000 barrels per day, Rystad Energy senior analyst Viktor Kurilov said in an email.
Are there no cheap alternatives left?
While the impact may eventually be mitigated as affected importers seek to source alternative suppliers in the Middle East, some industry observers say relief could still take weeks to months to materialize.
Even then, the price of oil from these alternative sources will no longer be as low. After the sanctions were announced, after a year of poor performance due to oversupply and weak demand, global benchmark Brent crude recently rose to a five-month high of around $80 a barrel.
Prices of Middle Eastern crude, one of India's alternatives, have also surged this week, data provided by Kpler suggests.
“Depending on how quickly Russia deals with its logistical challenges and how cooperative India and China remain on sanctions, oil prices could surge for several weeks,” Kpler's Xu said.
Additionally, as Donald Trump's inauguration approaches, global supplies of cheap Iranian oil also face the risk of tightening sanctions. Iran accounted for 4% of world oil production according to the EIA report published last year in 2023.
“It's (also) a double blow for a key importer (India) as Iran will likely face new sanctions pressures with the incoming Trump administration,” Helima Croft, global head of commodity strategy at RBC Capital Markets, told CNBC.
If the new sanctions are accompanied by a potential cut in Iranian oil, Brent crude prices could rise even higher, to $90 a barrel, Goldman Sachs wrote in a note published after the sanctions were announced.
A sore spot for the Indian economy
India's economy is 'significantly sensitive' to oil price fluctuations a scientific publication was created and published in 2023. Domestic retail prices of petrol and diesel are rising “like rockets” in response to rising crude oil prices, said Abdhut Deheri, assistant professor of economics at Vellore Institute of Technology, and M. Ramachandran, department of economics, Pondicherry University, in a research paper.
An analysis by the Reserve Bank of India in 2019 showed that crude oil prices rise every $10 per barrel could lead to an increase in headline inflation by 0.4%..
“High oil prices, if passed on to consumers, could further damage their purchasing power at a time when income and GDP growth have slowed,” Dhiraj Nim, ANZ economist.
However, weak consumer demand could discourage manufacturers from passing the burden of costs on to consumers, meaning it could instead reduce companies' profits, Nim added. Although if the government decides to incur additional costs, it will put a strain on its finances.
China and India will not only have to pay more for the oil they consume, but also to deliver it to their shores, as tanker rates have also increased, said Andy Lipow, president of consulting firm Lipow Oil Associates.
Combined with a stronger US dollar and a weaker rupee, the impact on India's economy will be greater, Lipow said.
As a result, the Indian rupee recently fell to a record low pressure from the strong dollar and sales by foreign portfolio investors.
The country is no stranger to protests over high fuel prices. In 2018 mass protests across the country amid record high gasoline and diesel prices, it has led to the closure of businesses and schools in several regions.