India may bear the brunt of US sanctions against Iran

• US sanctions on crude oil exports from Iran came into effect this week.
• According to the International Energy Agency, the global supply of crude oil will be hampered while exhausting any spare reserves.
• Even if India survives the sanctions, its demand for oil is still increasing and a supply crunch will lead to more expensive oil imports.

The newest sanctions placed by the US on the imports of crude oil from Iran may be targeted at weakening China, but will also hurt India in the cross-fire. And it’s not just because India is the second largest importer of crude oil from Iran after China, it’s also because India’s demands are growing faster than any other country in the world.

According to experts, while the European nations might still be convinced, the situation looks sticky with China refusing to even acknowledge the sanctions. The International Energy Agency (IEA) believe that the global supply for crude oil will be hit. Maintaining it will not only be challenging but come at the cost of depleting any spare capacity.

And what happens when there’s a demand-supply disparity? Prices start to increase. India’s demand isn’t going anywhere but if the global supply gets hit, importing from anywhere, not just Iran, is going to be a lot more expensive.

In June, India’s crude oil imports from Iran actually hopped up 52% as per the Directorate General of Commercial Intelligence and Statistics (DGCIS) as compared to June, the previous year. In terms of value, thats a 140% hike.

Here’s what’s happening

India, China and Spain were the few nations to boost their import of crude oil from Iran ahead of sanctions. The other nations went the opposite way and made large cuts. Especially South Korea, which is the largest importer of condensates from the US which are included in this round of sanctions.

That being said, in July, the oil exports coming out of Iran were already down 15% as compared to April. Though the sanctions haven't been imposed yet, businesses had already started withdrawing from the market.

The end game here is to push Iran oil exports down to zero, non-existent altogether. India’s stance on the matter is that cutting imports from Iran down to nothing just isn’t feasible.

The last time around Indian importers got creative with they oil purchases by seeking exemptions, buying in limited volumes, rerouting payments and finding alternative routes for shipping.

Even this time, the US Treasury has stated that nations can apply for ‘significant reduction exceptions’ before the next round of sanctions is implemented in November.

The executive department said that measures like the termination of pending contracts, reducing the percentage and quantity of crude oil from Iran and any other action that shows commitment to the cause would be considered an ‘effort that counts’.

But here’s the thing, this time the granting of waivers will require much bigger cuts than the last time. A 20% reduction month-on-month won’t be good enough anymore. And quite honestly, India sticks out like a sore thumb for increasing oil imports rather than going the other way.