Last month, the US imposed fresh sanctions on Indian purchases of Russian oil. Since the start of the Russia Ukraine conflict, India has emerged as a large importer of Russian oil. As of last month, around one third of India’s oil imports came from Russia. When the conflict first began, the previous US administration quietly encouraged India’s imports of Russian oil to keep prices low.
The current US administration is taking a different approach. Oil imports from Russia are expected to fall next month due to the additional sanctions. All of this is part of ongoing talks for a trade agreement between the US and India.
There’s evidence that these sanctions are having their intended effect. Reliance industries, one of the largest oil refiners, has agreed to stop importing Russian oil. They are planning to replace it with imports from the Middle East and the US.
Russian Oil Prices have Dropped the Most
The price data also confirms this. Let’s compare Russian oil to WTI and Brent Crude. WTI is the price of oil in the US, and Brent Crude is the price in the Middle East and Europe. On October 1, Russian oil was trading at a 6% discount to Brent Crude, and a 1% discount to WTI. As of November 6, Russian oil was trading an 11% discount to Brent Crude and a 5% discount to WTI. The increase in the discount price of Russian oil indicates that demand is dropping, relative to other benchmarks.
Interestingly, over the same period, crude oil prices are lower overall. Brent Crude is down by 3%, WTI is down by 4%, and Russian oil is down by 8%. This would not be the expected market response if these sanctions were to reduce overall supply.
What’s Changed in the Oil Market
Why did the US impose additional sanctions now? Why was the purchase of Russian oil quietly encouraged before? The answer lies in the price of oil then, and now. In February 2022, before the conflict began, the price of oil was around $90/barrel. In March 2022, prices reached a high of $122/barrel.
Given the high level of prices, there was a strong incentive to keep Russian oil flowing. And to keep the market well supplied. And so, India was encouraged to keep buying Russian oil. It was a good deal too, because Russian oil traded at a substantial discount to WTI and Brent Crude.
Today, oil prices are much lower, closer to the $60/barrel mark. At this point, the US is betting that disruptions to oil supply and a spike in prices won’t cause much damage. If prices are already low, oil importing countries can handle a price increase.
This is why fresh sanctions have been imposed. Oil prices are currently low, so the fallout is likely to be small. It remains to be seen whether India will comply fully (or partially) with the sanctions. The current evidence suggests at least partial compliance.
Ultimately, India’s incentive to comply with the US sanctions depends on what it gets in return. This will probably include some relief from tariffs, and an overall trade agreement.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
