Ukraine crisis: Rising crude prices may adversely impact Indian economy

Oil prices inched closer to $100 a barrel on Tuesday as tensions between NATO member countries led by the US and Russia further escalated over the latter’s recognition of the breakaway regions of Donetsk and Luhansk in eastern Ukraine.

“The Ukraine crisis so far hasn’t affected any oil & gas supplies to Europe. But there is a fear premium in crude because any US and European sanctions against Russia can indirectly impact the latter’s energy exports. Russia may squeeze supply in retaliation or might be hobbled by being cut off from the US dollar payment system,” founder at global oil markets macroanalysis firm Vanda Insights, Vandana Hari told Business Today from Singapore.

America and its allies have threatened fresh sanctions against Russia as president Putin ordered the deployment of troops in two breakaway regions. Analysts said disruptions to global oil supplies would push up prices further.

“Russia currently meets around 8 per cent of global oil consumption. In the case of gas, supplies are even more critical for Europe, which meets around 35-40 per cent requirement from the country. If sanctions are imposed against Russia, global oil markets will tighten further, leading to a runaway increase in oil prices. Gas prices, which are well poised to correct as seasonal demand is behind, may see a sharp increase,” remarked Harshvardhan Dole, energy analyst at IIFL Securities.

A cut in Russian supplies to Europe may affect distribution to other markets due to infrastructure constraints, especially of natural gas exported through pipelines. A move by Europe to source oil & gas supplies from elsewhere had the potential of leaving a big deficit for other consumers.

“India is already paying a huge price for the Ukraine standoff, as its crude import costs are spiralling up just as its import needs are also rising. Crude rocketing to $100 or beyond will inflict more pain on the man in the street, already reeling under inflationary pressures. This in turn will turn the heat up on the government to do something. The additional drain on foreign exchange from rising crude import costs is not good for the rupee’s strength,” said Hari.

“India hardly imports any oil from Russia, and to that extent, there are unlikely to be any supply disruptions. However, the price increase will adversely affect the oil import bill, and in turn, currency,” concurred Dole.

Impact on growth projections

India is the third-largest importer of crude after China and the US. The country is targeting to double the share of natural gas in a bid to diversify its energy basked by 2030. Last October the country received its first direct shipment of liquefied natural gas (LNG) from the Russian gas company Gazprom under a 20-year contract.

“The petroleum product prices will also see an increase, particularly aviation turbine fuel (ATF), diesel, petrol and liquefied petroleum gas (LPG). The oil marketing companies (OMCs) are expected to pass on the price increase in LPG, and other price-sensitive products once ongoing state elections are through,” said IIFL’s Dole.

The most recent hike in ATF prices of 8.5 per cent was announced on February 1, just minutes ahead of the presentation of the Union Budget in Parliament. As the spectre of yet another hike looms on the horizon, aviation analysts argue that any increase may be cushioned by the current restrictions on international flights to and from India and, therefore, be temporary.

“The impact of oil prices on aviation will not be long lasting unless the situation further escalates involving more countries as part of the situation in Ukraine. The limited opening up of markets in a way has provided a yield cushion for airlines to absorb the increasing or fluctuating costs,” averred partner at Mumbai-headquartered aviation consultancy Caladrius Aero Consulting, Rohit Tomar.

Business Today had earlier pointed out that geopolitical tensions, high oil prices, shortage of critical raw materials and a decline in exports may lead to moderation in growth forecasts for India, which is projected at 8-8.5 per cent for FY22-23. To this end, the developments in Ukraine are being closely monitored by New Delhi.

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