China and India to face supply jolt as U.S. targets Russia’s oil giants

The U.S. decision to impose sanctions on Russia’s two largest oil companies threatens to disrupt the energy pipeline connecting Moscow to its biggest customers in Asia, but has not led to an immediate supply shock, industry experts told CNBC.

US Treasury Department collected taxes on Wednesday sanctions on Rosneft and Lukoil, citing Moscow’s “serious lack of commitment” to ending the war in Ukraine. The ministry said the sanctions were aimed at “disrupting” the Kremlin’s ability to finance its war, signaling that more measures could be coming.

The government set November 21 as the deadline to end operations; This means the companies have almost a month to complete or cancel their existing agreements with Rosneft and Lukoil. Rapidan Energy Group President Bob McNally said this appeared to be designed to avoid causing sudden chaos in oil markets while applying pressure on Russia.

Data provided by Vanda Insights shows that Rosneft and Lukoil together account for nearly half of Russia’s crude exports of more than 4 million barrels per day; These quantities have steadily found their way into Asian markets since the West implemented a $60 price cap in late 2022.

In September, China imported about 2 million barrels of Russian oil per day, while India bought about 1.6 million barrels per day.

“This is potentially a very significant increase,” said Muyu Xu, senior crude oil analyst at commodity data analysis firm Kpler. “Trump’s sanctions on Rosneft and Lukoil” [will] “It will have significant impacts on Russia’s seaborne crude oil exports, potentially causing major buyers to reduce – if not completely stop – their purchases in the short term,” he added.

Sanctions in India are expected to affect many refineries directly connected to Russian supplies. According to Kpler data, India’s state-run refineries include Indian Oil, Bharat Petroleum, Hindustan Petroleum, as well as Reliance Industries, HPCL-Mittal Energy Ltd. and private giants such as Oil and Natural Gas Corp (ONGC) are among the most exposed.

Rosneft also owns about 50% of Nayara Energy Ltd., operator of the Vadinar refinery in Gujarat, and the company may struggle to sell refined products instead of producing crude oil.

Indian state-run refiners are currently reviewing Russian oil trading paperwork to verify that none of their supplies come directly from Rosneft or Lukoil. Reuters reported on Thursdayafter the sanctions were announced, citing a source with direct knowledge of the situation.

“India will likely have to give up maritime forward deals as China pipeline flows continue,” said Emma Li, oil market analyst at Vortexa.

Energy experts said refineries in China should also act carefully. Xu said all state-owned enterprises will be careful about cargo linked to Rosneft and Lukoil.

China National Petroleum Corporation has agreements with Rosneft for pipeline supplies but no long-term contracts for seaborne crude, according to Vortexa.

“I don’t expect the flow of crude oil in Russia to be completely cut off, but a short-term and immediate disruption seems inevitable,” Xu said.

Sanctions mean buyers must find new ways to transport and pay for those shipments, leading to extra costs and inconveniences, and that’s exactly what the U.S. wants, McNally said: Cutting into Moscow’s profits without halting its exports entirely.

Indian Oil, Bharat Petroleum, Hindustan Petroleum, ONGC, Reliance Industries and China National Petroleum Corporation did not immediately respond to CNBC’s requests for comment.

China and India will have no choice but to turn mostly to US and OPEC supplies, energy experts said. “There is currently spare capacity within OPEC, particularly in Saudi Arabia. But increased demand for global sanction-free supply will drive prices up,” said Again Capital partner John Kilduff.

Oil prices rose about 5% after Trump’s announcement before paring their gains slightly. While the global benchmark Brent was traded at $64.91 per barrel with an increase of 3.71% at 02:00 GMT on Thursday, US crude oil increased by 3.93% to $60.8.

Vandana Hari, founder of Vanda Insights, also said that the alternative to China and India is more Middle Eastern crude oil.

The new measures are a sharp departure from the G7’s previous price ceiling mechanism, which allowed Russian crude to flow as long as it sold below $60 a barrel. “This means you can’t buy Russian crude no matter what the price,” Kilduff said. “This is a blanket ban.”

“This is as high-profile as it gets, and Washington cannot risk looking like a paper tiger,” Hari said. “But a much bigger question is whether sanctions will continue… A Trump-Putin phone call could change the situation 180 degrees again.”