The impending U.S. sanctions on Russian crude are causing India to face an 'oil shock'.

• Russian oil producers and vessels shipping Russian crude have been hit with sanctions by the U.S.
• Analysts predict that India will be impacted the most by the sanctions, even more than China, which has also been purchasing Moscow's inexpensive oil, according to experts.
• Moscow accounts for approximately 40% of the 88% of oil that the South Asian nation imports.

India's days of buying cheap Russian oil could be over.

The U.S.'s imposition of sanctions on Russia's energy companies and oil shippers could make it harder for India to import inexpensive Russian oil, potentially increasing inflation in Asia's third-largest economy, according to analysts.

Rapidan Energy Group president Bob McNally stated that the country may face an oil shock.

He stated to CNBC that India will be more impacted by sanctions than China, as India imports a larger quantity of its oil from Russia compared to China.

On Friday, the U.S. Treasury imposed sanctions on two Russian oil producers and 183 vessels, primarily oil tankers, that have been transporting Russian crude. Currently, tankers subject to U.S. sanctions are still allowed to unload crude oil until March 12.

In 2024, the South Asian nation imported 88% of its oil requirements between April and November, which is almost the same as the previous year. According to Kpler, around 40% of these imports originated from Russia.

According to Kpler's data, 75 of the newly sanctioned 183 tankers have previously transported Russian oil to India. Last year, these 183 sanctioned tankers shipped approximately 687 million barrels of crude, with 30% of that going to India.

According to BNP Paribas' senior commodities strategist Aldo Spanier, who stated in a research note following the sanctions, most of the barrels went to Indian refiners, so the impact will likely be largest there.

Spanier stated that the new U.S. sanctions were more severe and extensive than anticipated by markets, and the consequences are predicted to intensify.

The Ministry of Petroleum and Natural Gas in India did not provide a comment when requested by CNBC.

Additionally, the sanctions are being imposed at a time when India is projected to become the world's top oil consumer in 2025, with a 25% share of global oil consumption growth.

The U.S. Energy Information Administration predicts that this year, the growth of 330,000 barrels per day in demand for transportation and home cooking fuels will be the highest among all countries.

In 2023, India consumed 5.3 million barrels per day, according to the EIA's most recent data. This consumption is predicted to have increased by 220,000 barrels per day in the previous year.

India wasn't always this dependent on Russian oil.

In 2021, Russian oil made up only 12% of India's oil imports by volume. However, by 2024, this share had increased to 37.6%, according to Muyu Xu, senior oil analyst at Kpler, as reported by CNBC.

The decline in prices of Russian oil due to the Ukraine war allowed India to purchase supplies at a lower cost from companies not affected by sanctions.

From August to October, the discount of Russia's Urals crude to the global benchmark Brent averaged around $12 per barrel, according to S&P Global's most recent data published in November. In 2024, Russia's Urals were also cheaper by $4 per barrel compared to oil from Iraq, one of India's main sources of crude oil imports, data from Kpler showed.

Xu stated that if India fully complied with U.S. sanctions, there could be a significant decrease in Russian crude imports in February and possibly March.

Viktor Kurilov, senior analyst at Rystad Energy, stated via email that disruptions to India could reach up to 500,000 barrels per day.

No more cheap alternatives?

The relief from the impact of the conflict in Yemen may not come quickly as affected importers search for alternative suppliers in the Middle East.

The recent increase in Brent's price to $80 per barrel, following the announcement of sanctions, is a five-month high, despite the fact that the price of oil from alternative sources will not be as cheap.

The prices of Middle Eastern crude, considered an alternative to India, have also increased this week, according to Kpler's data.

If Russia resolves its logistical challenges quickly and India and China remain cooperative with the sanctions, oil prices could increase for a few weeks, according to Kpler's Xu.

As the world prepares for Donald Trump's inauguration, the supply of cheap Iranian crude is at risk of facing tighter sanctions. In 2023, Iran accounted for 4% of the world's oil production, according to an EIA report released last year.

Helima Croft, global head of commodity strategy at RBC Capital Markets, stated that it will be a double whammy for India, the key importer, as Iran will likely face new sanctions pressure with the incoming Trump administration.

The potential increase in Iranian crude curbs could lead to a rise in Brent prices to $90 per barrel, according to Goldman Sachs' note following the announcement of new sanctions.

An Indian economy pain point

The Indian economy is "significantly vulnerable" to fluctuations in oil prices, as established in a research paper published in 2023. Domestic retail prices of gasoline and diesel surge "like rockets" in response to rising crude oil prices, according to Abdhut Deheri, assistant economics professor at the Vellore Institute of Technology, and M. Ramachandran from Pondicherry University's department of economics.

According to the Reserve Bank of India's analysis in 2019, a $10 increase in oil prices would result in a 0.4% rise in headline inflation.

If high oil prices are passed on to consumers, it could harm their purchasing power even more at a time when income and GDP growth have slowed, according to economist Dhiraj Nim of ANZ.

If consumer demand is weak, producers may not pass on the cost burden to consumers, which could negatively impact their profits. If the government takes on the additional costs, it could strain its finances.

The cost of oil consumption and delivery will increase for both China and India, as oil tanker rates have also increased, according to Andy Lipow, president of Lipow Oil Associates.

The impact on the India economy will be intensified due to the stronger U.S. dollar and weaker rupee, according to Lipow.

The rupee of India recently reached a new low due to the impact of a powerful dollar and selling by foreign investors.

In 2018, record-high petrol and diesel prices triggered widespread protests across the country, resulting in the closure of businesses and schools in several regions.