India faces oil shock as sanctions on Russian crude loom

The days when India bought Russian oil cheaply may be over.

Drastic U.S. sanctions on Russian energy companies and operators of oil-carrying ships will complicate Indian efforts to continue importing cheap Russian crude and could drive up inflation in Asia’s third-largest economy , estimate analysts.

The country could be facing a potential oil shock, said Bob McNally, president of Rapidan Energy Group.

“India will be hit more than China by the sanctions, since India imports a much larger amount of oil from Russia than from China,” he told CNBC.

Last Friday, the US Treasury announced sanctions against two Russian oil producers, as well as 183 ships, mainly oil tankers, that were carrying barrels of Russian crude. Currently, US-sanctioned tankers are still allowed to unload crude oil until March 12.

The South Asian nation imported 88% of its oil needs between April and November 2024, little change from the previous year, according to government data. About 40% of those imports came from Russia, according to data from market intelligence firm Kpler.

Of the 183 newly sanctioned tankers, 75 of them have already transported Russian oil to India, according to data provided by Kpler. Last year alone, the 183 sanctioned tankers transported around 687 million barrels of crude, 30% of which were shipped to India.

“Most of these barrels went to Indian refiners and, therefore, the impact will likely be greatest there,” Aldo Spanier, BNP Paribas senior commodities strategist, said in a research note following the sanctions.

The new US sanctions were tougher and broader than markets expected, and disruptions are expected to grow, Spanier added.

India’s Ministry of Petroleum and Natural Gas did not respond to a request for comment from CNBC.

The 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 oil consumption growth globally.

Growing demand for transportation fuels and home cooking fuels is expected to drive that growth by 330,000 barrels per day this year – the largest of any country, according to forecasts from the U.S. Energy Information Administration.

India consumed 5.3 million barrels per day in 2023, according to the most recent EIA data. This consumption should have increased by 220,000 barrels per day last year.

India has not always been so dependent on Russian oil.

As recently as 2021, Russian oil accounted for just 12% of India’s oil imports by volume. By 2024, that share had reached 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 against Russia and reduce their purchases of Russian crude. As Russian oil prices fell, India was able to obtain supplies more cheaply from companies that were not subject to sanctions.

The discount of Russian crude, the Urals, compared to Brent, the global benchmark, averaged around $12 per barrel between last August and October, according to the most recent data published by S&P Global last November. By 2024, Russian Urals oil was also $4 per barrel cheaper than Iraqi oil, one of India’s main sources of crude imports, according to Kpler data.

“If India were to fully comply with US sanctions, we could see a sharp decline in Russian crude arrivals in February and potentially March,” Xu added.

Supply disruptions in India could reach 500,000 barrels per day, Viktor Kurilov, senior analyst at Rystad Energy, said by email.

While the impact may eventually be lessened as affected importers scramble to find alternative suppliers in the Middle East, some industry observers say the relief could still take a few weeks, or even months, to materialize.

Even then, the price of oil from these alternative sources will not be as cheap. Brent, the global crude oil benchmark, recently hit a five-month high of around $80 a barrel following the announcement of sanctions, following a year of stagnation due to oversupply and low demand.

Prices of Middle Eastern crude, which is among India’s alternatives, also jumped this week, data provided by Kpler suggests.

“Depending on how quickly Russia resolves its logistical issues and how cooperative India and China remain in the face of sanctions, oil prices could rise for a few weeks,” Kpler’s Xu said.

Additionally, as Donald Trump’s inauguration approaches, the global supply of cheap Iranian crude also faces the risk of tougher sanctions. Iran accounted for 4% of global oil production in 2023, according to an EIA report released last year.

“It (also) is a double whammy for the main importer (India), as Iran will likely face further sanctions pressure from the new Trump administration,” Helima Croft told CNBC , global head of commodities strategy at RBC Capital Markets.

If the new sanctions are accompanied by a possible reduction in the price of Iranian crude, Brent prices could further rise to $90 per barrel, Goldman Sachs wrote in a note published after the sanctions were announced.

Indian economy is ‘significantly vulnerable’ to fluctuations in oil prices, says research paper released in 2023. Domestic retail prices of petrol and diesel are soaring ‘like rockets’ in response to rising prices crude oil, said Abdhut Deheri, assistant professor of economics at Vellore Institute of Technology and M. Ramachandran of the department of economics, Puducherry University, in the research paper.

A 2019 Reserve Bank of India analysis found that every $10 per barrel increase in oil prices could lead to a 0.4% increase in overall inflation.

“High oil prices, if passed on to consumers, could further damage their purchasing power at a time when income and GDP growth are slowing,” said Dhiraj Nim, an economist at ANZ.

However, weak consumer demand could deter producers from passing on the cost burden to consumers, meaning it could instead reduce corporate profits, Nim added. But if the government chooses 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, but they will also have to pay more to have it delivered to their shores because tanker rates have also increased, said Andy Lipow, chairman of the firm energy consultancy Lipow Oil Associates.

Combined with a stronger U.S. dollar and weaker rupee, the impact on the Indian economy will be magnified, Lipow said.

The Indian rupee recently plunged to a record low due to pressure from a strong greenback and selling by foreign portfolio investors.

The country is no stranger to protests against rising fuel prices. In 2018, widespread protests across the country against record gasoline and diesel prices led to the closure of businesses and schools in several regions.