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

U.S. decision to sanction Russia’s two largest oil companies threatens to disrupt the energy lifeline linking Moscow to its biggest customers in Asia, but without causing an immediate supply shock, industry experts told CNBC.

The U.S. Treasury Department on Wednesday levied sanctions on Rosneft and Lukoil, citing Moscow’s “lack of serious commitment” to ending the war in Ukraine. The sanctions aim to “degrade” Kremlin’s ability to finance its war, the department said, signaling more measures could follow.

The government has set Nov. 21 as the deadline for winding down operations, which means companies have nearly a month to wrap up or cancel existing deals with Rosneft and Lukoil. That seems to be designed to avoid causing immediate chaos in the oil markets while applying pressure on Russia, said Bob McNally, President of Rapidan Energy Group.

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

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

“This is potentially a very significant escalation,” said Muyu Xu, senior crude oil analyst at commodities data analytics firm Kpler. “Trump’s sanctions on Rosneft and Lukoil [will] have significant implications for Russian seaborne crude exports, potentially prompting major buyers to scale back purchases — if not halt them entirely — in the near term,” she added.

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In India, the sanctions are expected to hit several refiners directly tied to Russian supply. India’s state-run 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 among those most exposed, Kpler data showed.

Rosneft also owns nearly 50% of Nayara Energy Ltd., operator of the Vadinar refinery in Gujarat, and it may struggle with selling refined products, rather than obtaining crude.

Indian state-run refiners are currently scrutinizing their Russian oil trade paperwork to confirm that none of their supplies originate directly from Rosneft or Lukoil, Reuters reported on Thursday, following the announcement of the sanctions, citing a source with direct knowledge of the situation.

“India will likely need to walk away from its seaborne term agreements, while China’s pipeline flows may continue,” said Vortexa’s oil market analyst Emma Li.

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

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

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

Sanctions mean buyers will need to find new ways to move and pay for those shipments, which brings about extra costs and complications, and that’s exactly what the U.S. wants: to cut Moscow’s profits without completely stopping its exports, said McNally.

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

China and India will have little choice but to turn mostly to U.S. and OPEC supplies, noted energy experts. “There is spare capacity within OPEC right now, especially Saudi Arabia. But the increased demand for the global non-sanctioned supply will raise prices,” John Kilduff, partner at Again Capital.

Oil prices jumped around 5% before paring gains slightly after Trump’s announcement. Global benchmark Brent was trading 3.71% higher at $64.91 per barrel at 2.00 a.m. ET, Thursday, while U.S. crude had climbed 3.93% to $60.8.

Founder of Vanda Insights, Vandana Hari, also said that the alternative for China and India was more Middle Eastern crude.

The new measures differ sharply from the G7’s earlier price-cap mechanism, which allowed Russian crude to flow as long as it was sold below $60 a barrel. “This appears to imply that you cannot buy Russian crude oil regardless of the price,” Kilduff said. “It’s a blanket ban.”

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