The global energy market has its eyes set on the ongoing Israel-Iran conflict as the West Asian region is a critical cog in the international oil and gas flows. Indian refiners, too, are watching the developments closely as the region accounts for a significant share of India’s energy imports. Also, any major disruption in West Asian oil and gas exports could lead to a surge in oil and gas prices in the international market, which would also hurt India, which is counted among the world’s largest oil and gas importers with high import dependency.
To be sure, the conflict has so far not majorly disrupted physical oil and gas flows from the region, although some inflationary impact on shipping and insurance rates appears to have taken place in the form of higher geopolitical risk premium, industry sources said. There are also reports that a few shipping lines may be reassessing routes, particularly the choke point of the Strait of Hormuz, given the heightened threat in the region. This could further add to the transportation cost to and from the region.
As for oil prices, benchmark Brent crude jumped 7 per cent on Friday to over $74 per barrel, following Israel’s airstrikes deep inside Iran and the latter’s retaliation. However, despite some energy infrastructure being hit in the conflict over the past few days, oil prices have moderated slightly this week amid reports that Iran was pushing the US—through the Gulf powers—to pressure Israel into a ceasefire. Also, the most critical oil and gas supply infrastructure in the region is reported to be safe and export routes open and functional.
Energy industry insiders, trade sources, and experts appear largely unanimous in the view that the trajectory oil and gas supplies and prices take hereon amid this conflict would largely depend on whether the critical Strait of Hormuz will continue to be open for marine traffic, and whether oil and gas export infrastructure in the region would remained largely unharmed.
Strait of Hormuz: Critical for global energy flows
Strait of Hormuz is a critical narrow waterway between Iran and Oman, and connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The US Energy Information Administration (EIA) calls it the “world’s most important oil transit chokepoint”, with around one-fifth of global liquid petroleum fuel consumption and global liquefied natural gas (LNG) trade transiting through the strait. Much of India’s oil from key West Asian suppliers like Iraq, Saudi Arabia, and the UAE reaches Indian ports via the Strait of Hormuz. A bulk of India’s LNG imports, which come predominantly from Qatar, also come through this vital choke point.
India is the world’s third-largest consumer of crude oil and depends on imports to meet over 85 per cent of its requirement. The country is also among the top importers of LNG, depending on imports to meet around half of its natural gas demand. India’s largest source of crude oil is Russia, followed by West Asian suppliers Iraq, Saudi Arabia, and the UAE. India also buys oil from other countries in the region like Kuwait, Qatar, and Oman. Indian refiners do not purchase Iranian crude as Iran’s energy sector is under US sanctions.
According to tanker data analysed by The Indian Express, nearly 47 per cent of crude oil imported by Indian refiners in May was likely to have been transported via the Strait of Hormuz. The importance of the chokepoint for India’s energy supply and security cannot be understated.
Hormuz closure will hurt India
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Iran has reportedly threatened that it could consider closing the Strait of Hormuz amid the ongoing conflict, raising eyebrows globally. To be sure, Tehran has over the years made such threats at various points, but has never actually closed the strait even when it fought its worst wars. That is also because given the importance of the channel for global energy trade, any such attempt could draw a strong response from regional powers and even the US. It would, however, be too early to simply dismiss the possibility at this stage in the current conflict.
“It’s really hard to tell, but I would say it’s very unlikely for that (blockade of the Strait of Hormuz) to happen. And we’ve seen in the past, whenever there were indications or even threats that Iran might be doing this, you would hear statements from the US Fifth Fleet that they would immediately intervene and they would unblock the strait. Of course, it’s something that we need to flag as a risk. But for now, I would say it’s unlikely,” Amena Bakr, head of Middle East energy & OPEC+ insights at commodity market analytics firm Kpler, said in a recent webinar.
But if the critical water channel indeed is closed by Iran, Bakr said oil prices, which have been rather subdued for a few months, could jump to over $120 , or even $150 per barrel. Apart from supply disruption for India, the surge in international energy prices due to any such blockade would hit India due to its heavy reliance on imported oil. This makes India’s economy vulnerable to global oil price fluctuations. It also has a bearing on the country’s trade deficit, foreign exchange reserves, the rupee’s exchange rate, and inflation rate, among others.
Major oil producers like Saudi Arabia and the UAE have some alternative infrastructure in the form of pipelines to bypass the Strait of Hormuz for oil exports, but to what extent that would help would depend on the extent of the disruption to exports via the strait.
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According to officials in India’s refining sector, the prospect of elevated freight rates due to high risk premium for tankers passing through the Strait would lead to higher landed price of oil and gas for them, but that would still be significantly better than runaway oil prices due to any major supply disruption.
Threat to West Asian oil exports: Price impact
So far, Iranian oil export infrastructure doesn’t appear to have been targeted by Israel, which is a relief for the energy markets and countries like India, even though they do not buy oil from Iran. This is because some Chinese refiners buy a bulk of Iran’s oil exports and if Iran’s exports are majorly impaired due to the conflict with Israel, these buyers will scout for oil from other sources, which could lead to higher oil prices.
“If Iranian crude exports are disrupted, Chinese refiners, the sole buyers of Iranian barrels—would need to seek alternative grades from other Middle Eastern countries and Russian crudes. This could also boost freight rates and tanker insurance premiums… and hurt refinery margins, particularly in Asia,” Richard Joswick, head of near-term oil analysis at S&P Global Commodity Insights, said in a note on Saturday.
“The attack is obviously bullish near term for oil prices, but the key is whether oil exports will be affected. When Iran and Israel exchanged attacks last time, prices spiked, then fell once it was clear the situation wasn’t escalating and oil supply was unaffected,” said Joswick.
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While oil producers’ cartel OPEC has significant spare production capacity that they can use in case of a major outage of Iranian oil exports, it is important to note that much of that is with other West Asian oil producers, which are located in the broader Israel-Iran conflict zone. According to industry watchers, this spare capacity will only be helpful if other oil producers in the region are able to export to the rest of the world effectively. And that would have two key prerequisites—their own oil production and export infrastructure remains unharmed and the Strait of Hormuz remains open and safe for energy trade.