‘Crude price volatility amid Middle East conflict poses risk to India’

New Delhi: As strikes continue in the Middle East and alleged attacks on major oil producers in the region could increase volatility in crude oil prices worldwide, ICRA Ltd has warned on Saturday that this could hurt India’s oil import bill.

The Strait of Hormuz, which is considered one of the world’s most critical energy choke points, remains highly vulnerable in the ongoing conflict between Israel, the US, and Iran. The shipping route through this waterway is vital to the world, as it transports about 20 per cent of the world’s total petroleum products and an equivalent amount of liquefied natural gas.

“Geopolitical issues in the region are already impacting oil prices. The conflict in the Middle East and alleged attacks on several oil producers in the region would further aggravate the volatility in crude oil prices. Iran and several major oil producers are located in this region and are vulnerable through the Strait of Hormuz in the event of a conflict in this region. This could hurt India’s oil import bill,” Prashant Vasisht, Senior Vice President and Co-Group Head of Corporate Rating at ICRA, warned.

Vasisht also cautioned that escalation in the conflict affecting oil and gas producers or disruptions in the shipping route could also restrain the supply of oil and gas in the global market. “Any escalation involving major oil and gas producers or direct disruptions to shipping through the Strait could significantly affect global crude oil and LNG supplies. In addition, any attack on oil and gas production facilities of other major Middle East producers would further worsen the situation.”

The global market for crude oil is already reflecting the consequences of the conflict. As ICRA explained, the price of crude oil had increased from $65 a barrel to $72-$73 a barrel in the last few days because of the conflict. It was also cautioned that the price could increase further and may rise up to $80 a barrel or more.

For India, which imports 90 per cent of its crude, any increase in oil prices will have a direct impact on the bottom line. India remains one of the largest importers of crude from the Middle East. Therefore, any geopolitical tensions in the region will impact India.

Any increase in crude prices will result in an increase in the procurement costs of crude oil by Indian oil refineries like Indian Oil Corporation, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited. Since crude oil is the main input required by any refinery, any increase in crude prices will impact the profitability of these oil refineries.

Oil marketing companies will also be impacted by an increase in crude prices. This is because any increase in crude prices will not be reflected in the prices paid by the end consumers of the refined products. Therefore, any increase in crude prices will result in a decline in the profitability of oil marketing companies.

Another major strategic disadvantage that India faces is its dependence on the Strait of Hormuz. India imports 45 per cent to 50 per cent of its crude oil and more than half of its liquefied natural gas through the Strait of Hormuz. Therefore, any military tensions in the region will impact India’s crude oil imports. Any increase in the war risk insurance premium will increase the landed costs of crude oil.

Any increase in crude oil prices will have a major impact on the overall economy of India. For instance, an increase in crude oil prices will result in an increase in forex outflows, thereby expanding the current account deficit and impacting the value of the rupee. An increase in crude oil prices will result in an increase in fuel prices, thereby impacting inflation.

The ongoing conflict is also posing a threat to India’s natural gas outlook. A major part of India’s imported natural gas comes from the Middle East countries, especially Qatar. The natural gas supply occurs through the Strait of Hormuz. The prices of natural gas could rise if anything interrupts this supply. India has already started diversifying its natural gas supply and has started importing more natural gas from the US, Africa, and Latin American countries. This natural gas supply route is longer and more expensive. Besides this, the prices of crude oil are still set according to a global benchmark. This means that natural gas prices cannot be diversified.

ICRI stated that an increase in crude oil prices could impact oil marketing companies’ profits. Vasisht stated that a conflict among a number of oil producers could spill over and impact the global oil and natural gas markets. He stated that a sustained and widening conflict among oil and natural gas producers could have widespread implications for the world.

This could lead to an increase in prices and energy security issues in import-dependent countries.