As the threat of a full-scale conflict between Iran and Israel becomes more pronounced, analysts and trade sources say a further escalation in hostilities could impact crude oil supply, which in turn would lead to more volatility in prices.
ICRA’s Senior VP & Co-Group Head (Corporate Ratings), Prashant Vasisht, said: “If the Middle East conflict widens and affects other oil producing countries or key routes/ trade channels such as the Strait of Hormuz (which Iran straddles), oil and natural gas supplies would be impacted, which could have an adverse impact on crude oil and natural gas prices.”
Around 20 per cent of the world’s oil and liquefied natural gas (LNG) passes through the Strait of Hormuz, making it an important energy choke point, he said.
Pulkit Agarwal, Head of India Content (cross commodities), S&P Global Commodity Insights, said: “While there is no immediate impact given Iran, Israel or Lebanon are not significant oil trade partners for India, a wider West Asian conflict can impact India given our continued reliance on West Asian crude oil.”
Vasisht explained that higher crude oil prices will add to the oil import bill. Additionally, oil marketing companies (OMCs) could see marketing losses on sale of auto fuels in case retail prices are not revised. In case natural gas prices rise, the fertiliser subsidy bill would increase, besides which prices of PNG (Industrial and Commercial) would also rise.
However, while rising geopolitical tensions have a bullish sentimental impact on oil prices, the physical fundamentals for oil remain as is. The fundamental fears of oil oversupply and looming OPEC+ cuts continue to weigh in, even in the wake of the heightened geopolitical risk.
Vasisht said it would be difficult to predict the impact on crude oil prices as this is a geopolitical event driven impact.
Government officials, analysts and trade sources businessline spoke with expressed apprehensions of possible attacks on strategic and critical infrastructure on both sides, particularly oil and gas production, refining and supply.
For Iran, this can have a bearing on crude oil. China is a major buyer and an impact on Iran’s facilities could derail supply which, in turn, will infuse volatility in global supply and consequently oil prices.
Strategic Iranian facilities such as Kharg Island (primary oil export terminal in Persian Gulf), facilities near South Pars offshore field, or Abadan oil refinery, could be under threat.
For instance, Houthi rebels used drones to attack oil processing facilities in Saudi Arabia in May and September of 2019, disrupting supplies and adversely impacting market dynamics.
“What happens next will be determined by Israel’s response. Russia-Ukraine drone attacks on critical infrastructure are still fresh. So, supply could tighten or Red Sea transit could witness more attacks. It’s all fluid at present. It’s wait and watch for now,” a top official with a state-run refiner anticipated.
India does not import Iranian crude, which is under sanction. However, an escalating conflict between Iran and Israel will impact supplies and prices in West Asia, which accounts for almost 46 per cent of India’s crude oil imports in September 2024.
Domestic refiners could also face a hit on their export earnings as Israel procures refined petroleum products from India. In FY23, refiners sold refined products worth around $5.5 billion to Israel, which fell to $2.3 billion in FY24.