Renewed Iran–Israel conflict threatens Red Sea shipping route recovery, impact India trade

Indian Express

12 hours ago

Just as global shipping lines and traders had started to breathe a sigh of relief from elevated freight rates, with vessels returning to the crucial Red Sea route from the longer Cape of Good Hope passage, a conflict between two major West Asian powers — Iran and Israel —has reignited fears of surging oil prices and more trade disruptions.
The escalating tensions between Iran and Israel are also sending shockwaves through global stock markets, with India's benchmark Sensex closing 573 points lower on Friday.
Signs of a sustained escalation emerged after Israeli Prime Minister Benjamin Netanyahu said strikes targeting military and nuclear sites across Iran would continue 'for as many days as it takes'. This follows Israeli airstrikes that killed at least three senior Iranian military officers, including Hossein Salami, head of Iran's elite Revolutionary Guard. In response, Iran termed the attacks a 'declaration of war' and launched around 100 drones towards Israel in the early hours of June 13, many of which were intercepted, according to Israeli authorities.
Adding to tensions, US President Donald Trump stated that further Israeli strikes could be 'even more brutal'. Experts warn that Iran may respond by closing the strategic Strait of Hormuz — a key passage through which 20–25 per cent of global oil supply transits, as well as a critical corridor for LNG shipments from Qatar and the UAE. Qatar, notably, is among the top LNG suppliers to India.
The renewed instability could pose deeper macroeconomic challenges for India, extending beyond trade, particularly as the country's reliance on oil imports continues to rise. While India was compelled to halt oil imports from Iran following US sanctions in 2019, Goldman Sachs estimates that Iranian supply could fall by 1.75 million barrels per day (b/d) for six months before gradually recovering.
'Assuming OPEC+ compensates for half the peak shortfall from spare capacity, Brent could rise above $90 per barrel before retreating to the $60s by 2026 as supply recovers,' the investment bank noted.
A fall in prices of fruits, pulses, and cereals had helped lower India's headline retail inflation to a 75-month low of 2.82 per cent in May 2025. This easing inflationary trend had prompted the Reserve Bank of India's Monetary Policy Committee (MPC) to cut the policy repo rate by a larger-than-expected 50 basis points. However, the RBI cautioned that 'monetary policy is left with very limited space to support growth'.
S&P Global noted that, so far, both Iran and Israel have avoided directly targeting energy infrastructure. However, Israel has temporarily shut its Leviathan gas field — a key supplier to Egypt and Jordan — as a precaution. Iran, meanwhile, reported no damage to its oil refineries or storage depots in the initial attacks.
Iran possesses approximately 2.2 million b/d of crude refining capacity and an additional 600,000 b/d of condensate splitter capacity. In May, it produced about 4 million b/d of crude and condensate. According to S&P Global, Iran's crude exports could fall below 1.5 million b/d this month.
Federation of Indian Export Organisations (FIEO) President S C Ralhan had said in May that conditions in the Red Sea were improving, with ships resuming their regular routes. Exporters believed the risk of a wider conflict remained contained — as long as major powers like Israel and Iran stayed out of direct confrontation.
Now, with traders' worst fears materialising, vessels may be forced to continue using the Cape of Good Hope route. This detour means sustained upward pressure on freight rates. The Red Sea crisis had already caused a spike in shipping costs due to voyage times increasing by 10–14 days. Longer voyages also tightened vessel availability, exerting inflationary pressure on freight rates.
The crisis also hit liquefied natural gas (LNG) flows through the Suez Canal, which dropped to 4.15 million tonnes in 2024 — down sharply from 32.36 million tonnes in 2023 and 34.94 million tonnes in 2022, according to Kpler data. Meanwhile, LNG volumes via the Cape of Good Hope rose more than five-fold, from 11.76 million tonnes in 2022 to 59.37 million tonnes in 2024.
Ravi Dutta Mishra is a Principal Correspondent with The Indian Express, covering policy issues related to trade, commerce, and banking. He has over five years of experience and has previously worked with Mint, CNBC-TV18, and other news outlets. ... Read More