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India concerned about crude oil supply disruptions in Strait of Hormuz as prices surge after Israel's attacks on Iran
New Delhi: Indian policymakers are concerned about likely crude oil supply disruptions in the Strait of Hormuz – a key supply route for West Asian oil for the world's third-largest buyer – but are prepared for any eventuality after Israel's latest attacks on Iran sent oil prices surging to a two-month high, two people with knowledge of the developments said.
India is particularly at a disadvantage given that it imports almost 90% of its energy requirements, of which half comes from West Asian countries including Saudi Arabia, Iraq, Kuwait and the UAE.
Brent prices surged over 10% overnight and traded at about $74 per barrel, higher by 7.6% from its previous close, and way above $60 per barrel in May.
Israel launched airstrikes on Iran on Friday, targeting the country's nuclear infrastructure. The Israel Defense Forces said the coordinated strikes hit multiple locations across Iran, marking the most serious attack on the country since the Iran-Iraq war in the 1980s.
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Experts suggested that if the conflict continues and Iran blocks the Strait of Hormuz, which also has the loading ports of Saudi Arabia and the UAE, it may destabilize crude oil and natural gas trade. The narrow shipping passage accounts for about 20% of global crude oil supplies and 25% of liquefied natural gas trade.
"This is a major event and may cause disruption if the situation continues. The Centre is closely watching the situation and is prepared for any eventuality in terms of supplies to India and availability of energy in the country," one of the two people said.
An industry executive said on condition of anonymity that apart from the disruption of oil supplies in the Strait of Hormuz, the situation is likely to lead to higher freight and insurance rates, which will increase the landed cost of oil.
Supply risk
"About 20% of oil trade comes from that strait," said Prashant Vashisht, vice president with ICRA. 'Iran has threatened strikes on oil assets in Saudi Arabia and the UAE, Kuwait, and Qatar – there is potential supply risk. Further, Iran has threatened strike on in assets in other oil producers in the region, there is potential supply risk. Further, there is no alternate loading points for crude and gas which are generally loaded in that area. Only about 8% of the energy supplies coming through the strait can be diverted to other routes."
"Currently, it is a wait-and-watch situation for the government and oil marketing companies. It also needs to be seen how the situation evolves in the next few days and how prolonged this conflict is," the second person said.
An executive with an oil marketing company said there has been no immediate impact on supplies. However, there are concerns over supplies, going forward.
"For June, the cargoes are already booked. But the issue would come up in terms of insurance and freight rate, which will impact the eventual prices," the executive said.
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If prices remain high and continue to surge, the margins of oil marketing companies are likely to take a hit.
Every $1 increase in crude prices would result in an increase of 50-60 paise per litre in petroleum product prices. However, no immediate impact on retail prices is expected because oil companies have been posting a profit on the sale of products of late due to low oil prices, said industry stakeholders.
"At around $65 per barrel, oil companies were witnessing a healthy differential over pre-tax domestic and international prices of about ₹12 per litre of petrol and ₹9 per litre of diesel, this may now shrink," said Vashisht of ICRA.
Economic impact
JPMorgan predicted that oil prices may surge to $120 per barrel due to the conflict, which may lead to a 1.7% increase in retail inflation in the US. In the case of India too, there will be an economic impact, largely in terms of depreciation of the rupee against the dollar and on the balance of trade.
"If prices reach the projected level of $120 per barrel in the near term, it will have created pressure on the forex front and the balance of trade as the import bill rises. However, an impact on inflation is not expected as retail fuel prices are not likely to be immediately increased as they have been kept stagnant even when prices were low," said Madan Sabnavis, chief economist of Bank of Baroda.
Crude oil comprises about 20% of India's total import bill. India's crude oil import bill increased 2.7% to $137 billion in FY25, according to data from the Petroleum Planning and Analysis Cell.
State-run oil marketing companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum – have kept petrol and diesel prices unchanged since the ₹2 cut in March ahead of the elections last year.
Queries mailed to the ministry of petroleum and natural gas, the finance ministry, Indian Oil, Bharat Petroleum and Hindustan Petroleum remained unanswered till publishing time.
Navneet Damani, group senior VP and head of commodities research at Motilal Oswal Financial Services Ltd, said if Iran retaliates, prices would skyrocket and the worry is that the situation could escalate into a full-blown regional crisis, which would have significant implications for global oil supplies.
Volatile situation
"In a worst-case scenario, the Strait of Hormuz could be shut down, putting 20 million barrels per day of supply at risk. Prices have already jumped 10%, and any further escalation could push them up another 8-9%. It's a volatile situation, and everyone is holding their breath to see what happens next," Damani said.
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A similar conflict between the two countries in October last year led to a sudden surge in prices. However, as the situation eased, so did prices. Stakeholders are now looking at how the situation evolves and how long this conflict stretches.
Nikhil Dhaka, vice president at Primus Partners, said that although supplies are likely to be impacted, India's crude oil import basket is diversified with oil procured from Russia, the US and West Africa. OMCs have various options to source oil, going forward, although shipping costs of various routes need to be assessed.
'A prolonged impact on supplies through the Strait of Hormuz can significantly impact supplies globally, including India. For India, two-thirds of its oil and almost 50% of LNG flows through this route," he said.
In February and March 2022, as Russia invaded Ukraine, oil prices surged to multi-year highs of $130 per barrel, which led India to release oil from its strategic reserves to meet demand. India also increased purchases from Russia starting in 2022 as it offered deep discounts amid sanctions by the European Union and the US.
