Any escalation in the Iran-Israel conflict could impact India by way of costlier crude oil imports as geopolitical tensions in West Asia would bump up risk premiums, apart from fuelling concerns of potential supply disruptions from the oil-rich region. According to industry insiders, while the situation is still developing and it would take a few days to assess the real risk to regional and global oil flows, international oil prices could see high volatility in the immediate-to-near term.
India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85 percent of its requirement. Given the country’s extremely high import dependency, India’s economy is highly sensitive to oil price volatility. Apart from inflationary pressures, high oil prices have implications for India’s trade balance, foreign exchange reserves, the value of the rupee, and the overall health of the economy.
International oil prices have seen a spurt over the past few days amid the build-up in tensions between Iran and Israel, with global benchmark Brent crude breaching the $90-per-barrel mark. Prices were already seeing an uptick due to production cuts by major oil producers, and the rise in tensions in the Middle East are seen adding more upward pressure on prices. Some oil market analysts and industry watchers have started indicating that oil prices could be headed to $100 per barrel and beyond if the Iran-Israel conflict majorly impacts physical availability of oil due to supply and transportation disruptions, or potential attacks on oil production and processing facilities.
“Whenever there is a war-type situation in a region that is critical for oil supply or transportation, both speculative and real risks emerge. While the speculative risks (related to trading of oil) get built into prices fairly quickly, real risks (those related to actual production and supply) take slightly longer to emerge. Till the time the real risks are a bit clearer, there could be high volatility in prices,” said Mukesh Kumar Surana, CEO of Ratnagiri Refinery and Petrochemicals, and former chairman of public sector refiner Hindustan Petroleum Corporation (HPCL).
To be sure, India currently does not import Iranian oil as Tehran is under sanctions from the United States (US). However, another major buyer — China — does import large volumes of Iranian oil. If the conflict leads to Iranian supply getting hit, India’s competition with China for oil barrels from other suppliers — particularly Russia — is bound to intensify. India and China are currently the biggest buyers of the discounted Russian crude.
“If something were to happen to Iran’s crude production, it would first and foremost impact the flat prices of crude oil. Any bombing, any damage to infrastructure would lift oil prices well above $90 per barrel. India, being one of the world’s most import-dependent buyers of oil, would inevitably feel the pinch of higher prices,” said Viktor Katona, head of crude analysis at commodity market intelligence firm Kpler.
India does buy large volumes of crude oil from other West Asian suppliers like Iraq, Saudi Arabia, and the United Arab Emirates (UAE). Any major supply disruption in the wider region as a result of the conflict could impact supplies as well as prices. Officials in India’s refining sector said that they are closely watching the developing situation to assess the impact on supply and prices.
According to industry insiders, among the key things to watch out for would be the conflict’s impact on oil shipments through the Strait of Hormuz between the Persian Gulf and the Gulf of Oman, as the lion’s share of India’s West Asian oil supplies come from that route. With the Suez Canal-Red Sea shipping route already impacted by attacks from Iran-backed Houthi rebels of Yemen, a major disruption around the Strait of Hormuz could take a massive toll on global and regional oil flows.
“For India, the biggest risk of a wider conflagration in the Middle East would be mostly its crude supply. All Iraqi and Saudi barrels moving to India pass through the Strait of Hormuz, so any shutting of that passage would trigger a panic buying spree with Indian refiners,” Katona said. He, however, added that it is “very unlikely” that the Strait of Hormuz would get impacted as tensions between Saudi Arabia and Iran are not high currently.
In March, Russia was India’s top source of crude and accounted for 33 percent of New Delhi’s total crude oil imports during the month, as per ship tracking data from Kpler. Iraq, Saudi Arabia, and the UAE had a cumulative share of almost 48 percent in India’s total oil imports in March. At this stage, refinery sector officials do not appear too concerned about availability of oil, even as concerns of a potential upswing in prices intensify.
“We are fairly confident of securing our oil supply as India’s supplier base is quite large and diversified. But price-related concerns will definitely be there if the conflict intensifies. These are early days and we will wait and watch,” a senior official with a public sector refiner said on the condition of anonymity.
High oil prices are bound to exert pressure on refiners and fuel retailers’ financials as they could end up incurring losses on fuel sales, unless they decide to hike retail fuel prices in line with global rates. However, a price increase may not be feasible for the next few weeks in view of the Lok Sabha polls.
