Commodity news today, the latest developments in the commodity market are heavily influenced by America's recent sanctions on Russian oil.
Commodity update news: analysts indicate that the comprehensive U.S. sanctions on Russian energy companies and operators of oil transport vessels will complicate India's efforts to continue importing cheap Russian oil, potentially driving up inflation in the country, which is the third-largest economy in Asia.
Bob McNally, president of Rapidan Energy Group, stated that the country may be facing a potential oil crisis. "The impact of the sanctions on India will be greater than on China, as India imports significantly more oil from Russia than China does," he told CNBC.
Last Friday, the U.S. Treasury announced sanctions on two Russian oil producers and 183 vessels, primarily tankers transporting Russian crude oil. Currently, the sanctioned tankers can still unload oil until March 12.
According to government data, India's oil imports from April to November 2024 are expected to account for 88% of its total demand, showing little change from a year ago. Trade intelligence firm Kpler reports that about 40% of these imported oils come from Russia.
Kpler data indicates that of the 183 newly sanctioned vessels, 75 have previously transported Russian crude oil to India. Just last year, these vessels transported around 687 million barrels of oil, with 30% going to India.
"Most of this oil is directed towards Indian refiners, so the impact there may be the largest," said Aldo Spanier, senior commodities strategist at BNP Paribas, in a research report following the sanctions.
Spanier added that the new U.S. sanctions are more extensive and deeper than the market anticipated, and such disruptions are expected to amplify. The Indian Ministry of Petroleum and Natural Gas did not respond to CNBC's request for comments.
As sanctions come into effect, India is projected to surpass China by 2025, becoming the world's largest oil consumer, accounting for 25% of global oil consumption growth.
The U.S. Energy Information Administration (EIA) predicts that India's demand for transportation and cooking fuels will continue to rise, driving oil demand growth to 330,000 barrels per day this year, the largest increase among all countries. EIA's latest data shows that India consumed 5.3 million barrels of oil daily in 2023, an increase of 220,000 barrels per day compared to last year.
India has not always been so reliant on Russian oil. In 2021, Russian oil accounted for only 12% of India's oil imports. By 2024, this figure has surged to 37.6%, according to Kpler senior oil analyst Muyu Xu.
The catalyst for India's increased Russian oil imports has been the Russia-Ukraine conflict, which led some Western countries to impose sanctions on Russia and reduce their purchases of Russian oil. With the drop in Russian oil prices, India was able to secure cheap supplies from non-sanctioned companies.
According to S&P Global's latest report from November last year, the average discount of Russian Urals crude against the global benchmark Brent crude was approximately $12 per barrel from August to October. Kpler data also shows that in 2024, Russian Urals crude will be $4 per barrel cheaper than one of India's major oil import sources, Iraqi crude.
"If India fully complies with U.S. sanctions, we could see a sharp decline in Russian oil imports in February and March," Xu added. Rystad Energy's senior analyst Viktor Kurilov shared via email that supply disruptions to India could reach up to 500,000 barrels per day.
While affected importers scramble to find alternative suppliers in the Middle East, the impact of the new U.S. sanctions may eventually ease, but some industry observers suggest that this relief could take weeks to months to materialize.
Even so, crude oil prices from alternative sources are unlikely to be as cheap. Following the sanctions, Brent crude prices, which had languished due to oversupply and weak demand in the previous year, recently surged to a five-month high of around $80 per barrel.
Kpler data shows that prices for Middle Eastern crude oil, one of the alternatives to Russian crude, have also spiked this week. "The impact of the new sanctions will depend on how quickly Russia resolves its logistical challenges and how cooperative India is in the sanctions environment; oil prices could soar in weeks," Xu said.
Additionally, with the upcoming inauguration of Trump, the supply of cheap Iranian oil globally is also at risk of facing stricter sanctions. According to an EIA report released last year, Iran accounted for 4% of the world's oil production by 2023.
Helima Croft, global head of commodity strategy at RBC Capital Markets, told CNBC: "This is a double whammy for major importers like India, as Iran may also face new sanctions pressure once Trump takes office."
Goldman Sachs noted in a report following the sanctions that if new measures combine with potential restrictions on Iranian oil supplies, Brent crude prices could rise further to $90 per barrel.
A research paper published in 2023 highlighted that the Indian economy is "extremely vulnerable" to oil price fluctuations. Assistant professor Abdhut Deheri from Vellore Institute of Technology and M. Ramachandran from Pondicherry University noted that rising crude oil prices have caused domestic gasoline and diesel retail prices to "skyrocket."
An analysis by India's central bank in 2019 found that a $10 increase in crude oil prices could lead to a 0.4% rise in the country's overall inflation rate.
Economist Dhiraj Nim from ANZ said, "At a time when income and GDP growth are slowing, high oil prices passed on to consumers could further hurt their purchasing power."
However, Nim added that weak consumer demand may prevent producers from passing on cost burdens to consumers, which may in turn weaken corporate profits. If the government chooses to absorb the additional costs, it will strain its finances.
Andy Lipow, president of Lipow Oil Associates, stated that India not only needs to pay higher prices for imported oil itself, but also higher costs for oil arriving in the country due to rising tanker rates.
Lipow noted that combined with a strong dollar and a weakening rupee, the impact on the Indian economy will be magnified. The Indian rupee recently fell to a record low due to pressure from a strong dollar and foreign securities investors' sell-off.
Protests against high oil prices are not uncommon in the country. In 2018, widespread protests against record gasoline and diesel prices led to the shutdown of businesses and schools in several regions.
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