The crude oil market’s rather sanguine reaction to the U.S. threats to India over its continued purchases of Russian oil is effectively a bet that very little will actually happen.
President Donald Trump cited India’s imports of Russian crude when imposing an additional 25per cent tariff on imports from India on August 6, which is due to take effect on August 28.
If the new tariff rate does come into place, it will take the rate for some Indian goods to as much as 50per cent, a level high enough to effectively end U.S. imports from India, which totalled nearly $87 billion in 2024.
As with everything related to Trump, it pays to be cautious given his track record of backflips and pivots.
It’s also not exactly clear what Trump is ultimately seeking, although it does seem that in the short term he wants to increase his leverage with Russian President Vladimir Putin ahead of their planned meeting in Alaska this week, and he’s using India to achieve this.
Whether Trump follows through on his additional tariffs on India remains uncertain, although the chances of a peace deal in Ukraine seem remote, which means the best path for India to avoid the tariffs would be to acquiesce and stop buying Russian oil.
But this is an outcome that simply isn’t being reflected in current crude oil prices.
Global benchmark Brent futures have weakened since Trump’s announcement of higher tariffs on India, dropping as low as $65.81 a barrel in early Asian trade on Monday, the lowest level in two months.
This is a price that entirely discounts any threat to global supplies, and assumes that India will either continue buying Russian crude at current volumes, or be able to easily source suitable replacements without tightening the global market.
Are these reasonable assumptions?
The track record of the crude oil market is somewhat remarkable in that it quickly adapts to new geopolitical realities and any price spikes tend to be shortlived.
The Russian invasion of Ukraine in February 2022 sent crude prices hurtling toward $150 a barrel as European and other Western countries pulled back from buying Russian crude.
But within four months the price was back below where it was before Moscow’s attack on its neighbour as the market simply re-routed the now discounted Russian oil to China and India.
In other words, the flow of oil around the globe was shifted, but the volumes available for importers remained much the same.
Different this time?
But what Trump is proposing now is somewhat different. It appears he wants to cut Russian barrels out of the market in order to put financial pressure on Moscow to cut a deal over Ukraine.
There are effectively only two major buyers for Russian crude, India and China.
China, the world’s biggest crude importer, has more leverage with Trump given U.S. and Western reliance on its refined critical and other minerals, and therefore is less able to be coerced into ending its imports of Russian oil.
India is in a less strong position, especially private refiners like Reliance Industries, which will want to keep business relationships and access to Western economies.
India imported about 1.8 million barrels per day of Russian crude in the first half of the year, or about 37per cent of its total, according to data compiled by commodity analysts Kpler.
About 90per cent of its Russian imports came from Russia’s European ports and was mainly Urals grade.
This is a medium sour crude and it would raise challenges for Indian refiners if they sought to replace all their Urals imports with similar grades from other suppliers.
There are some Middle Eastern grades of similar quality, such as Saudi Arabia’s Arab Light and Iraq’s Basrah Light, but it would likely boost prices if India were to seek more of these crudes.
If Chinese refiners were able to take the bulk of Russian crude given up by India, it may allow for a re-shuffling of flows, but that would not appear to be what Trump wants.
Trump and his advisers may believe there is enough spare crude production capacity in the United States and elsewhere to handle the loss of up to 2 million bpd of Russian supplies.
But testing that theory may well lead to higher prices, especially for certain types of medium crudes which would be in short supply.
It’s simplistic to say that higher U.S. output can supply India’s refiners, as this would mean those refiners would have to be willing to accept a different mix of refined products, including producing less diesel, as U.S. light crudes tend to make more products such as gasoline.
For now the crude oil market is assuming that the Trump/India/Russia situation will end as another TACO, the acronym for Trump Always Chickens Out.
But the reality is likely to be slightly more messy, as some Indian refiners pull back from importing from Russia, some Chinese refiners may buy more and once again the oil market goes on a geopolitical merry-go-round.
