Analysts have warned that if Iran were to block the Strait of Hormuz, a vital passage for countries like India to import crude oil from Saudi Arabia, Iraq, and the UAE, both oil and LNG prices could soar, potentially leading to inflation spikes.
The conflict between Iran and Israel has intensified in recent days, marked by Iran's drone and rocket attacks on Israel, which prompted retaliatory missile strikes.
With crude oil prices hovering around $90 per barrel amid the conflict, Motilal Oswal Financial Services suggested in a note that while efforts to de-escalate the situation may mitigate the crisis, any complete or partial blockade of the Strait of Hormuz by Iran could trigger significant spikes in oil and LNG prices.
While alternative routes through the Red Sea exist for oil transportation, there are no such alternatives for liquefied natural gas (LNG), according to the analysis. In the event of blockade of the Strait, "we anticipate materially higher crude oil prices, refining margins, and spot LNG prices", it said. "While investors focus on oil, we believe that spot LNG prices will witness even sharper escalation if the Strait of Hormuz is closed due to the absence of alternative routes," it also said.
According to reports, alternative routes might only be capable of handling a small portion (approximately 7-8 million bpd of crude oil/refined products) of the current volume transiting through the Strait (21 million bpd), and even then, at increased freight expenses.
India, heavily reliant on overseas sources for over 85 percent of its crude oil requirements, imports oil from Saudi Arabia, Iraq, and the UAE, along with liquefied natural gas (LNG) from Qatar via the Strait of Hormuz.
"In case the situation worsens between Israel and Iran, it may lead to a spike in crude prices." Hardik Shah, Director, CareEdge Ratings, said the crude prices were on an increasing trend since the start of calendar year 2024.
"However, India still has a decent share of supply of Russian crude which comprises 30 percent of India's total imports by end FY24, and it should help to keep India's import bills for crude oil under check," he said. Moody's Analytics in an April 15 report said the escalation of tensions in the Middle East poses a significant threat to Asia-Pacific economies. "The key risk comes from higher oil prices".
Bbroadly there are three main challenges from rising oil prices. "First, they add to inflation through higher energy and fuel costs. Second, they add to the cost of production and overall transport costs, lifting prices on everything from food to flip-flops. The risk of higher food costs, via higher fertilizer, transport and seed costs, is especially worrisome because in much of Asia, it is stubbornly high food price inflation that keeps top-line consumer price indexes from retreating to central bank target ranges."
Third, higher oil prices can push up inflation expectations, making the job of central banks even harder, it said.
(With PTI inputs)
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