For much of the past two years, the market had adapted to the new order that emerged after Western sanctions on Russia following the Ukraine invasion. India and China absorbed the bulk of discounted Russian crude, providing Moscow with revenues while keeping global oil supply stable and prices from spiralling further. But with signals of possible diversification in India’s crude sourcing, including murmurs of a potential deal with the United States, the market faces the prospect of altered supply flows that could reshape the established equilibrium.

The context of the current uncertainty begins with the way sanctions reshaped global energy flows. When Europe, once the largest buyer of Russian oil, slashed imports and imposed price caps, Russia redirected its crude to Asia at steep discounts. India emerged as a key player, with its refiners turning into major buyers of Urals crude. By mid-2023, India was sourcing more than 40 percent of its crude imports from Russia, up from less than 2 percent before the war. This not only gave Indian refiners access to cheap feedstock, bolstering margins, but also stabilised the global market by preventing a supply crunch. China, too, played a similar role, though with different motives, as part of its broader strategy to strengthen its energy security. For oil markets, the combined absorption by India and China functioned as a buffer against Western sanctions disrupting supply.

But the stability was always fragile. The United States and its allies never completely accepted this workaround, as it blunted the impact of sanctions on Moscow. Their current hardening stance suggests an intention to more aggressively enforce restrictions on Russian oil sales, possibly through tighter monitoring of shadow fleets, stricter insurance enforcement, and secondary sanctions on buyers. This raises the risk for countries like India that have built a strong dependence on Russian oil. While New Delhi has so far resisted Western pressure by invoking its sovereign right to energy security, it also remains pragmatic. With its ties with Washington expanding strategically and economically, India is unlikely to ignore the possibility of diversifying its oil sourcing if the terms are favourable. The growing speculation of a potential US-India energy deal reflects this pragmatism.

For the United States, this would be a logical extension of its attempt to deepen ties with India as a counterbalance to China. Washington has surplus production capacity due to its shale revolution and would like to expand its footprint in Asian markets. Already, US crude exports have surged in recent years, with India emerging as a top destination. According to US Energy Information Administration data, India was one of the largest importers of American crude in 2023, although Russian supplies eventually displaced some of these flows. A structured deal, possibly involving long-term contracts or preferential pricing, could restore and expand US market share in India while aligning geopolitical interests. For India, diversifying away from overdependence on Russia also makes sense, particularly at a time when Middle Eastern tensions threaten to disrupt supplies and drive up prices.

The Middle East dimension adds yet another layer of complexity. With the Israel-Gaza conflict continuing and tensions involving Iran showing signs of escalation, the region remains a potential flashpoint for oil supply disruptions. Any miscalculation could threaten critical shipping lanes such as the Strait of Hormuz, through which a fifth of global oil trade passes. This risk premium is already being reflected in Brent crude prices, which surged last week on fears that the conflict could spill over. For India, which sources a significant portion of its oil from the Middle East, this is a reminder of the vulnerabilities inherent in over-reliance on one region. Diversification, whether toward Russian, American, or even African crude, is not merely opportunistic but necessary to hedge against geopolitical risks.

If India indeed moves to strike a deal with the United States, the implications for the oil market would be significant. It would not necessarily mean an abrupt end to Russian oil imports, given the economic advantage they still offer, but it would alter flows enough to create ripples. Russian barrels displaced from India could flood other markets, forcing Moscow to offer deeper discounts or increase shipments to China, Turkey, and smaller Asian economies. This could lead to heightened competition and price distortions in the Asian market. At the same time, the re-entry of US crude into India at a larger scale could boost transatlantic energy trade while reducing Moscow’s leverage in Asian markets. The net result would be greater fluidity in supply patterns, a scenario that traders and refiners would have to adapt to quickly.

The market, in turn, would need to reassess its assumptions about risk and stability. For much of 2023 and early 2024, the narrative was that Russian crude had found a new home in Asia and that the global oil market had reached a new normal. That normal is now being challenged by the twin forces of Western resolve to squeeze Russia and the volatility of the Middle East. Brent’s recent weekly gain is a reflection of this uncertainty. Prices had softened earlier in the year as fears of recession weighed on demand forecasts, but the latest developments suggest that supply-side risks are back at the forefront. If enforcement of sanctions tightens and Middle Eastern tensions worsen, the upward pressure on prices could persist well into the final quarter of the year.

For consumers like India, higher prices pose obvious economic risks, including inflationary pressures and strains on the current account deficit. That makes the case for securing stable and diversified supplies even stronger. New Delhi has long walked a fine line in balancing relations with Russia, the United States, and the Middle East, and its energy diplomacy reflects that balance. The potential deal with Washington, therefore, should not be seen as an abandonment of Moscow but as part of a hedging strategy. Still, in a market where every shift in supply patterns has global consequences, such a move would undoubtedly reshape expectations. (IPA Service)