As Russia and India strengthen their energy alliance, circumventing Western sanctions and changing trade patterns, the world oil market is going through a dramatic upheaval. Inflation, energy security, and stock markets in the United States will all be significantly impacted in the coming years by this expanding partnership.
The Growth of the Oil Trade Between Russia and India
1. The Development of India-Russian Oil Trade
India has become one of the largest consumers of Russian oil since the conflict in Ukraine started in 2022; imports now account for more than 40% of its total crude purchases, up from just 2% in 2021. Important motivators include
- Significant savings (Urals crude is $15–$20/barrel less expensive than Brent).
- Alternative payment methods that circumvent the sanctions imposed by the US dollar include dirhams, yuan, and rupees.
- Geopolitical neutrality (India prioritizes affordable energy and declines to join Western sanctions).
2. Russia’s Turn Away from Europe
Nearly half of Russia’s oil exports were purchased by Europe prior to the war. Currently, 80% of Russia’s crude is being absorbed by China and India, with 90% of those flows moving to Asia. This has:
- decreased Russia’s dependence on markets in the West.
- bolstered the “shadow fleet” of sanctions-avoiding tankers.
3. U.S. Sanctions and Exclusions
A $60/barrel price cap on Russian oil was set by the U.S. and G7, but enforcement has been lax.
- India is still using non-Western currencies to make purchases above the cap.
- Although aggressive action runs the risk of alienating India, secondary sanctions on shipping companies could disrupt trade.
The Impact of This on the US Market
1. Bearish Effect on Oil Prices and Inflation:
- Higher Russian-Indian flows maintain a high global supply, averting significant spikes in oil prices and assisting in the cooling of U.S. inflation.
- Bullish Risk: Oil prices could rise above $100/barrel, rekindling inflation, if supply is disrupted by Middle East tensions (Israel-Iran) or more stringent sanctions.
2. Benefit to the U.S. Energy Sector & Stocks Refiners
- India’s cheap processing of Russian crude floods international markets with gasoline and diesel, putting pressure on the margins of U.S. refiners.
- Oil Giants Adjust: Cheap Russian barrels could pose a long-term threat to Exxon and Chevron.
3. Risks of Dollar Dominance and Geopolitics
- De-Dollarization: The petrodollar’s hold may wane if more transactions are made in yuan or rupees.
- Tensions between the United States and India: Washington must strike a balance between upholding sanctions and maintaining India as a strategic ally against China.
Conclusion: Things to Keep an Eye on
For the United States, the oil trade between Russia and India has two sides. While it helps suppress oil prices, it also challenges U.S. sanctions policy and dollar dominance
- The G7’s next course of action regarding price cap enforcement.
- India’s options for currency settlement (dollar vs. alternatives).
- Shocks to the world’s oil supply (Middle East, Russia production cuts).
Investors ought to keep an eye on:
- Energy stocks (refiners, XOM, and CVX)
- Data on inflation (CPI, PPI)
- Fed rate decisions (risks of inflation driven by oil)
Will the U.S. tolerate India’s Russian oil trade, or will sanctions tighten? The response may determine the next significant change in inflation, oil prices, and stock prices.