The Impact of Red Sea Conflict on India’s Oil Trade

Asia’s second largest oil and gas importer India is keeping a wary eye on the Houthi Red Sea conflict, as international maritime trade is being constrained severely. While most Western shipping companies have diverted their vessels via South Africa’s Cape, some flag countries still are sailing through the Red Sea without any real threats, as Chinese and Russian vessels are showing. Even that India is a vast importer of Persian Gulf related oil and gas volumes, not only from Saudi Arabia, UAE or Qatar, but also Iran, New Delhi has strong military-economic interests in free-passage in the Suez Canal-Red Sea region too.

Not only India’s commercial maritime trade with Europe depends on access to these vital maritime choke-points, but it also depends on Russian crude oil volumes. As reported by S&P Global, Russia has been India’s biggest crude oil supplier in 2023, holding a market share of around 35% or 1.7 million bpd in 2023. The last months of 2023 however overall Russian crude volumes decreased substantially, hitting a level of 1.43 million bpd in December, a drop of 620,000 bpd in comparison to May.

The last month worries about the effects of a full-scale Houthi blockade of the Red Sea, or a Western military operation in the region, has been on the mind of Indian traders and politicians. Until now however, the Houthi attacks on vessels in the Red Sea have not been hitting Russian energy supplies to Asia at all. Indian sources have indicated that until now no Russian crude oil vessels have been affected in the Red Sea arena. S&P also reported that no Russian vessels have been diverted due to the Houthi actions, or possible Iranian naval operations. At present international traders supplying Russian crude oil or products to India still prefer the Red Sea – Bab El Mandab route. Most Western companies at present are diverting ships via the Cape of Good Hope shipping route.

Russian Crude At Sea Supports Indian Refineries

Data shows that Russia holds at present around 112 million barrels of oil on water, of which 43.7 million barrels are expected to go to India. S&P Global stated that out of the latter, around 19.2 million barrels are positioned in proximity to the Indian subcontinent, covering the Arabian Sea, Indian Ocean East, and Southeast Asia. This means that in case of a real direct military operation in the Red Sea or increased Houthi actions, Indian refineries will be still receive ample Russian supplies.

This picture however is less positive than maybe is painted. Moscow definitely will be using the fact that other suppliers are having major security issues in the Red Sea, and are diverting via Cape of Good Hope, hence overall crude oil prices will increase. Moscow’s current very low price settings, based on large discounts offered to Asian customers, could be kept in place, but would be still showing higher prices due to global market developments.

A possible solution to all could be a reassessment by India of its current vast preference for Russian oils, as Middle East suppliers could offer lower price settings or even be more economically and geopolitically attractive. If Russian crude is less attractive, Saudi Arabia’s price cuts will be doing the rest. At present however Indian refineries are still counting on Russian crudes, especially Sokol grades.

As reported, Indian refineries import around 150,000-160,000 bpd of Sokol. The latter has witnessed due to Russian weather constraints, higher Middle Eastern flows and refinery maintenances a very low level in December 2023. Analysts however expect this to pick up very soon again.

Indian Fuel Demands Hit December Record

Demand for crude imports are expected to stay very strong, as December 2023 figures provided by the Indian Oil Ministry’s Petroleum Planning and Analysis Cell (PPAC) show that domestic fuel demand hit around 20.054 million metric tons in December, a seven month high. The PPAC also stated that India’s domestic fuel consumption, which is directly linked to oil demand, increased in December by 6% in comparison to the 18.89 million tons in November or 2.6% higher than December 2022. The report stated that diesel sales increased by 0.9% month-on-month to 7.60 million tons, while gasoline decreased by 4.5% from the previous month to 2.99 million tons.

Houthi’s Red Sea Actions Cost India $30 Billion

The costs of the Houthi actions against maritime trade in the Red Sea could cost India around $30 billion in the current fiscal year. An assessment done by New Delhi-based thinktank RISDC states that higher costs and delays in shipping could be reducing India’s exports by 6.9% or $30 billion.

Main underlying reason is that, as indicated by leading shipping broker Clarkson Research Services, the Houthi actions have reduced Suez Canal vessel volumes by around 44%. Clarkson stated that vessels with a combined tonnage of about 2.5 million gross tons passed through in the week to January 3, around 1.5 million less than in December 2023.

India’s exports are very dependent on the Red Sea – Suez Canal route, as it is its main maritime route to Europe, Africa and the US East Coast. In a reaction to the current maritime threats by Houthis India has already sent a warship to the Arabian Sea. The Indian Federation of Indian Export Organizations stated already that the Red Sea conflict has pushed Indian exporters to hold back around 25% of the outbound shipments transiting through the Red Sea. At the same time, freight charges are also spiking.