As tensions between the US and India escalate, significant uncertainty shrouds the oil market currently.
The imposition of secondary tariffs by the US on purchasers of Russian oil remains highly uncertain. Recent discussions have largely focused on the US’ imposition of such tariffs against India.
Trump said Tuesday he will increase the 25% tariff on Indian exports to the US “substantially over the next 24 hours,” citing the Asian nation’s high barriers to trade and its purchases of Russian oil.
“India and China are likely to maintain their purchase patterns, with little incentive to turn to the US for answers as trade negotiations unfold,” Mariano Alonso, vice president, commodity markets analysis at Rystad Energy, said in an emailed commentary.
For India, the incentive to continue buying Russian oil remains strong, provided the nation is prepared to absorb the impact of these measures while addressing its energy security challenges.
Source: Rystad Energy
Question of quality
India’s strong commitment to safeguarding its national energy interests is likely due to a substantial challenge in crude oil quality rather than quantity, from a fundamental perspective, Rystad Energy said.
“To resolve the stand-off, the US will probably need to offer alternative crude supply options within its sanctions framework,” the Norway-based energy agency added.
India requires a balanced crude oil import strategy, comprising roughly 60% medium, 30% light, and 10% heavy crude oil grades, data from Rystad showed.
Despite the Ukraine crisis, total imports of medium-quality barrels have remained consistent at approximately 2.5-2.8 million barrels per day, a category that includes Russian crude.
India’s Russian oil imports have risen sharply under the price cap mechanism.
This rise is attributed to a reduced supply of barrels from other nations, a consequence of sanctions, OPEC+ production cuts, and the redirection of barrels to Europe.
According to Rystad, the need for medium barrels is going to grow by another 1 million barrels per day by 2030.
The primary challenge revolves around the quality of the barrels.
If the US produced medium sour barrels, India would likely prioritise purchasing from them over Russia. However, the US predominantly offers light sweet barrels, a grade India already produces domestically and has limited demand for.
Effectiveness of US threats
India, China, and Turkey have been purchasing Russian oil through the EU’s price cap mechanism. These transactions have not violated any existing sanctions or tariffs.
“News of stricter US action targeting India for purchasing Russian barrels—but not China—has raised questions about the effectiveness of such measures,” Rystad said.
Enforcement of this policy could exacerbate market distortions and alter trade patterns. Consequently, more Russian oil may flow to China, while India might increasingly source its supply from other OPEC+ nations in the Middle East.
The desired impact might be achieved if US actions were applied to both India and China.
This scenario seems improbable due to current trade negotiations with China.
Considering the challenging circumstances within India’s oil infrastructure and the limited impact of US interventions, it’s improbable that all stakeholders in the Ukraine-Russia conflict will opt for a de-escalation strategy rather than intensifying the situation.
“Whatever metric or dashboard you look at, the market currently lacks clear direction, with uncertainty lingering…” Alonso said.
OPEC’s role
“Market chatter is growing that China’s purchases of Russian oil may come into focus next,” Warren Patterson, head of commodities strategy at ING Group, said in a note.
If India were to stop buying Russian oil amid tariff threats, we believe the market would be able to cope with the loss of this supply.
This would eliminate the projected market surplus for late this year and much of 2026, leading to a manageable, albeit upward, pressure on prices.
A greater risk emerges if more buyers avoid Russian oil, necessitating OPEC’s swift and aggressive utilisation of spare production capacity to stabilise the market. This scenario could lead to substantial price increases.
The pivotal question, however, is whether India and China will cease their acquisition of Russian oil.
“If we cast our minds back to 2022, the expectation was that Russian oil flows would fall significantly following the start of the Russia-Ukraine war. Yet volumes held up well, with barrels rerouted to new destinations,” Patterson added.
“OPEC’s decision to raise production offers a global buffer, stabilizing prices in the near term,” Rystad’s Alonso said.
Alonso also believes that oil prices are not expected to break out unlike ING’s Patterson.
“The actual release of OPEC+ barrels versus targets will continue to drive narrow-range volatility around the $65/bbl level,” according to Rystad.
Strong backwardation, evident in front-month time spreads, indicates a tight crude market in the near term.
