Red Sea crisis: India’s Russian oil buys get more expensive on detour due to Houthi attacks

The Red Sea strait is crucial for 30 percent of global container traffic and 12 percent of global trade

India's Russian oil purchases are likely to be getting more expensive as shipments from Moscow start taking a longer route via the Cape of Good Hope to avoid attacks on commercial vessels on the Red Sea route, a government official said.

"There has been some impact on oil imports since Russian oil is losing that (Red Sea) route, so they are sending it via a longer route, which is making it more expensive," this official said.

The Cape of Good Hope on the southern tip of Africa has become the next best choice for cargo ships in a bid to avoid the conflict-ridden Red Sea region.

Due to the Houthi attacks, shipping costs have risen for Indian firms as leading freight companies take the longer route around Africa to reach the west, or wait at nearby ports for safe passage through the Suez Canal.

After the outbreak of the Russia-Ukraine war, India had stepped up oil imports from Moscow since they were offering heavy discounts. Given the cheaper supply, Moscow has taken over the top spot in India's crude oil imports, followed by Iraq and Saudi Arabia.

Impact of sanctions by the Group of Seven nations on ships and vessel operators carrying Russian oil sold above the $60 a barrel cap had already made crude from Moscow a less attractive option for New Delhi than before, but considering that the fallout of the Red Sea crisis could further push up prices, India is likely to depend more on its traditional West Asian Partners for crude requirements.

India's crude oil imports from Russia fell for a second straight month in January to its lowest in 12 months, according to media reports citing data from energy cargo tracker and industry officials. Russia supplied 1.2 million barrels per day of crude oil to India in January, down from 1.32 million barrels in December and 1.62 million barrels in November 2023, as per figures from energy cargo tracker Vortexa. Russia though continued to be India's top oil supplier.

Currently, crude oil prices are trading at around $80 per barrel against the highs of $140 per barrel witnessed in 2022.

"Cape of Good Hope is 30 percent longer than the Red Sea route. The impact of this is, first, your journey time has gone up and second, freight cost per day has also risen. Freight costs have already increased globally due to disruptions and if the route has become longer that would create a significant impact," Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA told Moneycontrol.

Russian crude loaded at western ports for Asian buyers was able to pass through the Red Sea, despite attacks on merchant vessels from Yemen-based Houthi rebels. However, reportedly two tankers carrying Moscow’s oil were mistakenly targeted by the rebels last month.

This has seemingly prompted Russia to take the longer route like many other shipping companies to escape the security risk.

Moneycontrol reported on January 18 citing a government official that if the Suez Canal crisis spreads, India has the option of relying more on countries like Iraq for its crude oil needs since it comes through a safer route, given concerns that the flow of Russian oil may get delayed or disrupted given the recent spate of attacks.

"Sourcing crude oil for India would not be an issue as we have supplies from Middle-East countries. Shipments from Middle-Eastern producers such as Saudi Arabia, and Iraq use the Strait of Hormuz where no disruption has been reported. So, even though Russia continues to remain the top supplier of crude oil to India, it is expected supplies from Iraq would go up," according to Hitesh Jain, Lead Analyst, Yes Securities.

Traffic via the Cape of Good Hope has gone up with shipments taking at least 10-12 days more to reach the destination compared to the Red Sea strait. This clearly means that freight costs would have gone up, Jain added.

Since the outbreak of the Israel-Hamas war in October, the Red Sea has been in the news for periodic attacks on commercial vessels by the Houthi rebels of Yemen, raising concerns about its impact on global maritime commerce. The strait is crucial for 30 percent of global container traffic and 12 percent of global trade. About 80 percent of India's merchandise trade with Europe passes through this route.

India is the world's third-largest importer and consumer of oil, and imports over 80 percent of its needs. The country also exports a significant amount of petroleum products to Europe, which have reportedly declined substantially in January owing to rising tensions in the Red Sea.