Why Iran's threat to block Strait of Hormuz could have huge bearing on India
The 'ceasefire' announced by US president Donald Trump on June 24 had initially raised hopes of an end to the Israel-Iran conflict and had positively impacted oil prices. Crude oil prices weakened, falling to $68 a barrel for Brent crude on June 25, from the highs of $78 seen two days ago.Oil prices had earlier threatened to cross $80 a barrel after the US joined the conflict and dropped 'bunker-buster' bombs that it claimed had destroyed Iran's key nuclear sites.advertisementBut the situation continues to be tenuous, as both Iran and Israel have reportedly breached the 'ceasefire' agreement and continued to rain missiles on each other. All eyes are on whether Iran will carry out its threat of closing the Strait of Hormuz, which lies between the Persian Gulf and the Gulf of Oman and is the only marine entryway into the Persian Gulf.The Strait of Hormuz is one of the world's most strategically located 'choke points', through which a fourth of the oil for global consumption and a third of the world's liquefied natural gas supplies pass. There were media reports that Iran's Parliament, the Majlis, had approved the closure of the Strait of Hormuz in response to the US attack on the country's nuclear facilities.
Any disruption in the flow of vessels through the Strait will have a direct impact on oil and gas supply and prices. A shutdown of the Strait can put 20 million barrels per day of supply at risk, say analysts. India will be affected in a big way, prodding the Centre to reportedly find alternative ways to surpass the Strait.advertisement'In FY25, as much as 54 per cent of India's gas imports and 45 per cent of its oil imports came through the Strait of Hormuz,' says Prashant Vasisht, senior vice-president and co-group head, corporate ratings, at ICRA. Some of the major oil suppliers to India through this route are Iraq, Saudi Arabia, the UAE and Kuwait, he adds.India is the third largest consumer of oil in the world, importing 89 per cent of its crude oil requirement and consuming over 5 million barrels per day (bpd). The US is the largest consumer of oil, with 20 bpd of consumption, followed by China (15.2 bpd).According to a Bank of Baroda report, India imported 244 million tonnes of crude oil in FY25, the compounded annual growth rate (CAGR) in the last 10 years being 2.6 per cent. 'This does indicate that the oil intensity of the economy has come down with the growing focus on a greener economy,' says the report.Regarding suppliers to India, there has been a sea change since 2022 after the outbreak of the Ukraine war when India channelled its sourcing more to Russia. Russia accounted for 36 per cent of India's imports of crude oil in FY25, followed by Iraq (20 per cent) and Saudi Arabia (nearly 14 per cent).advertisementIn case Iran shuts the Strait of Hormuz, India will have to significantly increase its off-take from countries like Russia, US and Brazil. An increased off-take from these countries will help India bridge the gap, but it will prove to be much costlier, widening the current account deficit (difference between the value of India's imports and exports). 'All these producers on the Strait of Hormuz don't have loading facilities or pipelines to divert produce to other locations (in case of a disruption),' says Vasisht.A Crisil report on June 20 said the impact of any further significant increase in crude oil prices would vary across sectors. The impact on profitability for companies in that sector would depend on the ability to pass on the cost increase to customers, the report said.'Higher oil prices will benefit upstream oil companies (those involved in oil exploration and production) because it translates to more revenue, while their costs are fixed. For downstream oil refiners, operating margins could get squeezed due to higher input cost as they may have limited ability to fully pass on the same through increase in retail fuel prices,' the report said.advertisementSubscribe to India Today Magazine- EndsMust Watch
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