President Donald Trump cited India's imports of Russian
crude when imposing an additional 25% tariff on imports from India on August 06,
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 50%, a level high enough
to effectively end US imports from India, which totalled nearly US$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 US$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.
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 short-lived.
The Russian invasion of Ukraine in February 2022 sent crude
prices hurtling toward US$150 a barrel as European and other Western countries
pulled back from buying Russian crude.
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 US 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 37% of its total, according to
data compiled by commodity analysts Kpler.
About 90% 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 US 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
US 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 messier, 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.
