India preps oil Plan B; Iran hits US bases in Qatar, Iraq

Mint

7 hours ago

India has prepared a 'Plan B' for oil imports that includes leveraging existing sources of supplies to ensure energy security, two persons informed about the matter said, even as Iran launched missiles at US bases in Qatar and Iraq late on Monday.
While the Indian government has been working on its plan since Israel first struck Iran on 13 June, the attack on US bases threatens to draw the US deeper into the West Asia conflict. In the past, Iran has threatened US forces at Al Udeid Air Base, which hosts the forward headquarters of the US military's Central Command.
India's Plan B for crude oil will be activated to tide over any exigencies in the event of Iran closing the Strait of Hormuz. To be sure, this vital choke point has remained open even during the years-long Iran-Iraq war in the 1980s. The move comes amid fears of the conflict intensifying, with the US hinting at a regime change in Tehran. Economists expect the crisis to be short-lived and the impact on the economy temporary, but fear investor sentiment may suffer during the crisis.
'India sources crude oil from about 39 countries. This bolsters our position of having multiple sources of oil supply even in the worst-case scenario of a closure of the Strait of Hormuz, which has never happened even during the Iran-Iraq war,' one of the two people cited above said on the condition of anonymity. 'We have 75 days of crude oil reserve including the inventory, also comprising products held by oil marketing companies,' the person added.
Out of the 5.5 million barrels of crude oil that India consumes daily, about 1.5-2 million barrels transit the Strait of Hormuz.
At the time of writing the story, the August contract of Brent on the Intercontinental Exchange was trading at $77.88 per barrel, higher by 1.38% from its previous close. Similarly, the August contract of West Texas Intermediate on the NYMEX rose 1.23% to $74.75 per barrel.
Queries sent to the Union petroleum ministry remained unanswered.
The war in West Asia showed no signs of letting up on Monday, as bombs and missiles rained down in Israel and Iran. However, Iran is yet to act on its threat of closing the Strait of Hormuz, a development that could block a fifth of the world's oil cargoes and send oil prices into a spiral.
Rahul Kalantri, vice president for commodities at Mehta Equities said: "Oil prices extended gains for a third straight week amid rising geopolitical tensions and a sharper-than-expected drawdown in US inventories. The ongoing hostilities between Israel and Iran have heightened supply concerns across West Asia, a region critical to global oil exports."
On Monday, stock market investors took the West Asia pounding in their stride, with benchmarks recouping much of their intra-day losses. The Sensex tumbled over 900 points during the day, but recovered to close with a loss of 511.38 points or 0.62% at 81,896.79. The Nifty dropped 140.50 points or 0.56% to 24,971.90.
Experts and sector stakeholders said the market is watching how Iran responds to attacks on its nuclear facilities.
The disruption to trade over the Strait of Hormuz may be transitory as any prolonged uncertainty here can hurt Asian nations more than the West, said Rumki Majumdar, an economist at Deloitte India.
'If one considers the million barrels per day of crude oil and condensate transported through this straight, around 60% was traded to Asia, with China accounting for 30% alone in 2024. The exposure to US and EU is less than 10%,' said Majumdar.
'We believe the disruption will be temporary, leading to a temporary spike in global oil prices, and is expected to subside thereafter. The US will also increase its supply from its shore to meet the demand gap. India is probably cushioned enough to manage the temporary price spike through its reserves, so we believe that rising oil prices may not have an impact on India's current account deficit as much,' added Majumdar.
'However, investor sentiment can be more sensitive to geopolitical tensions and in periods of uncertainty, capital tends to flow out of emerging markets. A depreciation in the domestic currency can in turn make energy imports costlier even if dollar price of oil stays rangebound. This can put pressure on current account deficit and retail price inflation,' said Majumdar.
Meanwhile, shipping rates have taken collateral damage from the unfolding conflict.
Anil Devli, chief executive of the Indian National Shipowners' Association (INSA), said spot freight rates had increased by 150% since the start of the Israel-Iran war. 'Experts and analysts note that a complete closure is unlikely due to the severe economic and strategic risks for Iran itself, though the threat has already heightened tensions and could lead to increased harassment of shipping in the area," Devli added.
With Iran threatening to block the Strait, freight rates and premiums may increase further, increasing the landed cost of key supplies such as oil, industry executives and government officials said. If the Strait of Hormuz is closed, both oil prices and tanker and vessel rates on the route are expected to surge significantly. Shippers also fear the war cover provided to vessels operating in the region may be withdrawn if the Israel-Iran conflict escalates further.
Daily freight rates of tankers and vessels from West Asia to Japan and South Korea have increased to $50,000 (per vessel) from $20,000 about 10 days ago.
The Reserve Bank of India (RBI) has already frontloaded its rate cuts with a 50 basis points reduction in repo rate at the last monetary policy committee meeting. At the next monetary policy review in August, the central bank will have more information on monsoon showers, food prices and the West Asia situation, she explained. 'Unless there is a full-blown war or heightened global tensions leading to spike in inflation, we expect the rates to remain steady,' Majumdar of Deloitte added.
UBS said in a research note on Monday that in its base case scenario, it does not expect the escalation in West Asia conflict will lead to a prolonged disruption to oil supplies in a way which could imperil global growth or cause significant challenges for central banks.
India's ₹ 1.68 trillion fertilizer subsidy bill for FY26 also faces the prospect of swelling as natural gas price, which tends to follow crude oil price, and shipping cost tend to go up during periods of geopolitical tension.
Around 100,000 tonnes of basmati rice destined for Iran are stranded at Indian ports due to the conflict, All India Rice Exporters Association said on Monday.
According to the Iranian state media, the Iranian parliament has already voted to block the Hormuz Strait in retaliation. However, the proposal needs the approval of the country's Supreme National Security Council.
Iran currently produces about 3.3 million barrels per day (mbd) of crude oil, exporting 1.8-2.0 mbd. While Iranian oil facilities have reportedly been hit, the extent of damage remains unclear. However, the larger risk lies in a broader regional conflict that could pull in other major oil producers in the Gulf.
However, any move to block the strait may put significant cost pressures on India, even though it no longer buys oil directly from Iran due to US sanctions. Crude supplies from Iraq, Saudi Arabia, Kuwait, and the United Arab Emirates, all routed via the Strait of Hormuz, account for around 36% of India's total imports. About 60% of its natural gas imports also cross this critical passage.
Union petroleum minister Hardeep Singh Puri on Sunday posted on X that India has diversified its supplies in the past few years, and a large volume of its supplies does not come through the Strait of Hormuz. On 13 June, as prices surged after Israel's attacks on Iran, Puri held a review meeting and tweeted that India has adequate energy supplies for the coming months.
"Given the geopolitical tensions in the past few years, the Indian government and oil marketing companies have diversified their sources of oil across several countries. And OMCs usually have stocks of more than three months. Such initiatives may help minimize impact on product supplies in the near term," said Gaurav Moda, partner and leader for energy at EY-Parthenon India.
An industry executive on condition of anonymity said that prices usually surge significantly in two phases—first, on anticipation of supply disruption and later when disruption is actually witnessed in physical supplies. "For now the surge post anticipation of disruption has by and large taken place and that has been factored in. Now if the strait is actually blocked and supplies get halted, that is when we may see a major rippling effect in prices," the executive said.
Oil marketing companies (OMC), would also feel the pinch of high oil prices, while for the exploration and production companies it would bear a positive impact due to higher prices, experts said.
Noting that oil prices are up 21-25% since May-end, a report by Kotak Institutional Equities said that the strait of Hormuz is "too critical to be disrupted for long".
"Short-term disruptions can lead to further price spikes. Unless the conflict worsens (and impacts the wider ME region), we do not see much impact on demand or supplies. Oil prices would likely trace back if the conflict ends soon. For India, higher oil/gas prices are negative. But for upstream PSUs, these are positive. For OMCs, while higher oil prices are negative, retail price cuts are now on the back-burner," it said.
It said that when oil prices were declining and were around $60 per barrel, OMCs were witnessing high margins and there was an expectation of retail price cuts "With geopolitical worries rising, retail price cuts are unlikely soon. If retail prices were cut, a reversal would have been difficult. But if the conflict eases soon, margins may further rise. While OMCs' near-term earnings will remain strong (despite the oil price spike), our key concerns remain on the lack of pricing power and large capex," said the Kotak report.
Some of India's exports to Iran are vital for the West Asian nation. India supplies affordable, life-saving medicines to Iran. Because of international restrictions, Iran struggles to get western medicines. This makes them highly dependent on India for common generic drugs, as well as special medicines for serious illnesses like cancer. India also sends raw materials for making drugs, a pharma company executive said, requesting anonymity.
India's pharmaceutical exports to Iran crossed $28 million in FY25.
Subhash Narayan and Priyanka Sharma contributed to this story.