Asia's Largest Oil Buyers Face Challenges in Securing Hormuz Alternatives

Global Oil Crisis Deepens as Asia's Largest Buyers Face Energy Shock

Asia's largest oil buyers have been able to mitigate the impact of over seven weeks of war in the Persian Gulf by implementing workarounds, shielding not only their own economies but also those of neighboring countries competing for cargoes. However, this luck is beginning to run out as China and India face an unprecedented energy shock.

To cope with the energy crisis, China and India have turned to various measures, including bilateral agreements with Tehran and tapping cargoes of Russian and Iranian oil already on the water. However, these floating supplies are slowly drying up, and traffic through the Strait of Hormuz has come to a standstill due to a US blockade. Even blacklisted vessels serving China's private refining sector are hesitant to test the blockade.

India is the more vulnerable of the two countries, relying heavily on the Gulf for crude oil and liquefied petroleum gas, which is used for cooking. With limited stockpiles, India has increased Russian shipments to fill the gap, largely protected by US waivers. Refiners say they are covered for the coming month, but prices are far from the discounts seen in the years since the invasion of Ukraine.

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Key Statistics:

In mid-February, there were 20 million barrels of Russian crude in floating storage and available for purchase. This figure has now dropped to less than 5 million barrels, according to Anoop Singh, global head of shipping research at Oil Brokerage Ltd. Data intelligence firm Vortexa Ltd. puts the figure at close to 3 million barrels.

India had secured safe passage for LPG and other carriers through the Strait of Hormuz after a bilateral deal with Iran. However, after a chaotic weekend when two of its vessels came under attack while attempting to cross the waterway, the government summoned Tehran's ambassador and put off plans to send empty vessels into the Gulf for loading.

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The government has taken up the issue with Iran "very strictly," Randhir Jaiswal, spokesperson for the Ministry of External Affairs, told reporters on Monday. Iranian cargoes, already complicated for conservative Indian refiners due to other sanctions in place, are now off the table entirely after Washington allowed a temporary permit for Iranian oil to lapse at the weekend.

As a result, consumers in the world's most populous nation are bracing for the first widespread increase in diesel prices in four years, with hikes by state-owned refiners expected into next week after state elections wrap up. This, combined with a weak currency, will stoke inflation and eat into economic growth.

China, on the other hand, is in a better position, thanks to years of focusing on energy security, plus more than 1 billion barrels in reserves and significant power as the world's top consumer. Smaller economies are more liable to be squeezed out by larger neighbors, but even Beijing is feeling the impact of higher prices as flows dry up in the face of an unprecedented energy crunch. Without the Strait of Hormuz, global supply shrank 10% last month, according to the International Energy Agency.

State-owned processors have already cut back, and pressure is increasing on private refiners, the so-called teapots, which account for as much as a fifth of China's refining capacity. They are left to face both higher prices and reduced supply.