India to Rely on Middle Eastern Oil Amid Tougher US Sanctions on Russia

India's oil import strategy is set for a major overhaul as the latest US sanctions on Russian producers and vessels threaten to disrupt supply lines. With nearly 36% of India's total oil imports coming from Russia last year, domestic refiners are now eyeing alternatives in the Middle East, Africa, and the Americas to offset the expected shortfall.

The US Treasury's new sanctions, announced on January 10, target Russian energy giants Gazprom Neft and Surgutneftegas, along with 183 vessels involved in shipping Russian oil. Analysts suggest this move will restrict Russian oil exports, forcing countries like India to scramble for new suppliers and pushing up global freight costs and oil prices.

Impact on India’s refiners

Indian refiners, who rely heavily on Russian Urals crude, are bracing for a reduction in supply. "We have no choice but to increase purchases from the Middle East, even if prices rise," an official from a leading Indian oil refining company stated. The sanctions are expected to narrow Russia’s ability to price its crude competitively, further compelling India to turn to compliant markets.

In 2023, India imported an average of 1.76 million barrels per day (bpd) of Russian crude, marking a 4.5% increase from the previous year. However, the latest sanctions are likely to reduce the availability of Russian crude significantly, particularly as the designated tankers accounted for 42% of Russia's total seaborne crude exports last year.

Rising costs and alternative suppliers

Spot prices for Middle Eastern and African oil grades have already surged due to tightening supplies of Russian and Iranian crude. Analysts predict India will increase its reliance on crude from Gulf nations such as Oman and UAE while exploring opportunities in the Atlantic Basin for US or Brazilian oil.

The sanctions are expected to trigger a global realignment in oil trade flows. China, another major buyer of Russian crude, is also likely to seek alternative sources in the Middle East and Americas, exacerbating competition for these supplies.

Chinese imports of Russian ESPO Blend crude, which constituted 20% of the country’s total imports last year, could face significant disruption if the sanctions are strictly enforced. Meanwhile, India may need to diversify further to inccrude shipments, despite higher freight costs.

Outlook for Indian energy security

For Indian refiners, the immediate focus is to secure steady supplies amid rising geopolitical pressures.

While Russia may attempt to lower its crude prices below $60 per barrel to retain buyers, analysts believe the sanctions will limit the effectiveness of such measures. As a result, Indian refiners are unlikely to take the risk of prolonged dependence on Russian oil and will accelerate efforts to secure long-term contracts with compliant suppliers.

(With Reuters Inputs)