US targeting of Russian oil giants will cause supply shock to China and India

A U.S. decision to sanction Russia’s two biggest oil companies risks disrupting the energy lifeline that connects Moscow to its biggest consumers in Asia, but without an immediate supply shock, industry experts told CNBC.

The US Treasury Department levied the charges on Wednesday Approval on Rosneft and Lukoil, citing Moscow’s “lack of serious commitment”. End of the war in Ukraine. The sanctions are aimed at “degrading” the Kremlin’s ability to finance the war, the department said, adding that further measures could be taken.

The government has set a deadline of November 21 for the shutdown, meaning the companies have almost a month to wrap up or cancel existing deals with Rosneft and Lukoil. It’s designed to avoid immediate chaos in the oil market while putting pressure on Russia, said Bob McNally, president of Rapidan Energy Group.

Rosneft and Lukoil, which together account for roughly half of Russia’s 4 million barrels of crude exports, have found stable homes in Asian markets since the West imposed a $60 price cap in late 2022, data provided by Vanda Insights shows.

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

“This is potentially a very significant increase,” said Mu Xu, senior crude oil analyst at commodity data analytics firm Kepler. “Trump’s sanctions on Rosneft and Lukoil (will) have a significant impact on Russian marine crude exports, potentially prompting major buyers to scale back purchases – if not stop them altogether – in the near term,” she added.

In India, the sanctions are expected to hit several refiners directly linked to Russian supplies. India’s state-owned refiners – Indian Oil, Bharat Petroleum, Hindustan Petroleum – as well as private giants such as Reliance Industries, HPCL-Mittal Energy Ltd, and Oil and Natural Gas Corp (ONGC) are the most exposed, Kpler data shows.

Rosneft also owns nearly 50% of Naira Energy Ltd, the operator of the Wadinar refinery in Gujarat, and could block it from selling refined products instead of getting crude.

Indian state refiners are currently scrutinizing their Russian oil trading documents to ensure that none of their supplies come directly from Rosneft or Lukoil. Reuters reported on ThursdayAfter the announcement of the sanction, citing a source with direct knowledge of the situation.

“India will have to walk away from its maritime term contracts, while China’s pipeline flows can continue,” said Emma Lee, oil market analyst at Vortexa.

Refiners in China will also have to be careful, energy experts said. All state-owned enterprises will be cautious about cargoes linked to Rosneft and Lukoil, Xu said.

China National Petroleum Corporation has a contract with Rosneft for pipeline supply, but not a long-term contract for Seaborne crude, according to Vortexa.

“I don’t expect a complete shutdown of Russian crude flows, but a short-term and immediate pause seems inevitable,” Zhu said.

The sanctions mean buyers will have to find new ways to move and pay for those shipments, creating additional costs and complications, and that’s exactly what the U.S. wants: to cut profits without stopping Moscow’s exports entirely, McNally said.

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

Energy experts noted that China and India have little choice but to turn mainly to the US and OPEC for supplies. “OPEC currently has excess capacity, particularly Saudi Arabia. But demand for global non-approved supplies will increase prices,” said John Kilduff, partner at Again Capital.

Oil prices rose about 5% after Trump’s announcement before recovering slightly. Global benchmark Brent U.S. crude was up 3.71% at $64.91 a barrel at 2:00 a.m. ET on Thursday, while U.S. crude was up 3.93% at $60.8.

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

The new measures differ sharply from the G7’s previous price-cap mechanism, which allowed Russian crude to flow as long as it sold below $60 a barrel. “It seems to mean that you can’t buy Russian crude at any price,” Kilduff said. “It’s a blanket ban.”

“This is as high-profile as it gets and Washington can’t risk looking like a paper tiger,” Hari said. “But the big question is whether the sanctions will last … The Trump-Putin phone call could turn the situation 180 degrees again.”