India is in for an oil shock as sanctions on Russian crude loom

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

Broad U.S. sanctions against Russian energy companies and operators of vessels that transport oil will complicate India’s attempts to continue importing cheap Russian oil and could fuel inflation in Asia’s third-largest economy, analysts said.

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

“India will be more affected by the sanctions than China because India imports much more of its oil from Russia than China,” he told CNBC.

Last Friday, The US Treasury has imposed sanctions against two Russian oil producersas well as 183 vessels, which are mainly oil tankers, delivering barrels of Russian crude oil. Currently, the tankers under US sanctions are still there allowed to ship crude oil until March 12.

South Asian nation imported a significant 88% of its oil needs between April and November 2024, little changed from a year earlier, according to government data. About 40% of these imports come from Russia, Kpler trade intelligence data showed.

Of the 183 new tankers that were sanctioned, 75 of them previously transported Russian oil to India, according to Kpler data. Last year alone, the 183 sanctioned tankers transported about 687 million barrels of crude oil, of which 30% was sent to India.

“Most of these barrels have gone to Indian refiners, so the impact is likely to be greatest there,” BNP Paribas senior commodities strategist Aldo Spanier said in a post-sanctions analyst note.

The new U.S. sanctions were deeper and broader than markets had anticipated, and disruptions are expected to intensify, Spanier added.

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

Sanctions also come at a time when India is expected to surpass China as the world’s number one oil consumer in 2025, it accounts for 25% of the total growth in global oil consumption.

Increased demand for transportation and home cooking fuel should push that rise to 330,000 bpd this year, the largest of any country, according to U.S. forecasts The Energy Information Administration showed.

According to the latest EIA data, India will consume 5.3 million barrels per day in 2023. That consumption is expected to have risen by 220,000 barrels a day last year.

India was not always so dependent on Russian oil.

As late as 2021, Russian oil accounted for only 12% of India’s oil imports. That share will rise to 37.6% by 2024, Kpler senior oil analyst Muyu Xu 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 purchases of Russian oil. As Russian oil prices fell, India was able to arrange supplies cheaply from non-sanctioned companies.

The price of Russian Urals crude against global benchmark Brent averaged about $12 a barrel from August to October, according to S&P Global. latest published data last November. In 2024, Russian Urals oil was also $4 a barrel cheaper than oil from Iraq, one of Major sources of crude oil imports into IndiaKpler data showed.

“If India fully complies with US sanctions, we may see a sharp decline in Russian crude oil supplies in February and possibly March,” Xu added.

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

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

“It’s (also) a bit of a double whammy for a key importer (India) as Iran is likely to face new sanctions pressure with the incoming Trump administration,” Helima Croft, head of global commodity strategy at RBC Capital Markets, told CNBC.

If the new sanctions are combined with a potential curb on Iranian oil, Brent prices could rise even higher to $90 a barrel, Goldman Sachs wrote in a note published after the sanctions were announced.

India’s economy is ‘significantly vulnerable’ to fluctuations in oil prices, in a research paper published in 2023. Domestic retail prices of petrol and diesel have been rising “like rockets” in response to rising crude oil prices, Abdhut Deheri, associate professor of economics at the Vellore Institute of Technology, and M. Ramachandran of the Faculty of Economics, University of Pondicherry.

A 2019 Reserve Bank of India analysis found that every $10 per barrel increase in oil prices may lead to an increase in general inflation by 0.4%..

“High oil prices, if passed on to consumers, could further erode their purchasing power at a time when income and GDP growth has slowed,” Dhiraj Neem, an economist at ANZ.

Still, weak consumer demand could prevent manufacturers from passing the cost burden on to consumers, meaning companies’ profits could fall instead, Nim added. Although if the government decides to take on 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, they will have to pay more to get it to their shores because oil tanker rates have also risen, said Andy Lipow, president of energy consultancy Lipow Oil Associates.

Coupled with the strengthening of the US dollar and the weakening of the rupee, the impact on the Indian economy will be amplified, Lipov said.

As a result, the Indian rupee recently fell to a record low the pressure of a strong dollar and sales by foreign portfolio investors.

The country is no stranger to protests due to high fuel prices. In 2018 widespread protests across the country amid record high gasoline and diesel prices, businesses and schools have closed in several regions.