The conflict between Iran and Israel has not led to a disruption in India’s crude oil supplies from the Middle East as of now but have resulted in higher shipping costs for refiners, executives at oil marketing firms have told Moneycontrol.
Currently, the Indian refiners are witnessing 8-9 percent increase in shipping costs while there has been marginal impact on insurance rates, said an executive with an oil refinery on condition of anonymity.
The heightening tensions between the two Middle Eastern countries have triggered a dramatic spike in crude prices over fears of a possibility of disruption in the global supply chain as Iran threatens to close the Strait of Hormuz - a vital shipping route.
“As of now, we have reasonable inventories. (If Strait of Hormuz is blocked,) Saudi and other Middle East crude can travel through other routes as well. Surely, the shipping costs will shoot through the roof,” another executive said.
Also Read: Iran-Israel conflict: Why India's energy sector is worried about Strait of Hormuz closure threat
The Strait of Hormuz - located between Oman and Iran - is a key shipping route through which Organisation of Petroleum Exporting Countries (OPEC) members - including Saudi Arabia, Iraq, Kuwait and several others - ship oil to Asia. Indian oil refiners buy a significant chunk of their crude supplies from these nations.
Any disruption in this shipping route could lead to higher freight and insurance costs for Indian oil marketing companies (OMCs), increasing the landed cost of crude oil for the companies. OMCs do not disclose insurance and freight costs incurred by them on purchasing crude oil.
Indian oil refiners source around 40 percent of crude oil supplies from the Middle East nations such as Iraq, Saudi, the UAE and Kuwait. State-run OMCs include Indian Oil Corporation Limited (IOC), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL).
“We are currently monitoring the situation. Supply from the region is not affected until now. If the route (Strait of Hormuz) is blocked, it will take much longer time for supplies (to reach India),” a third executive said. OMCs incur higher shipping costs when longer routes are taken.
Queries sent to IOC, BPCL and HPCL remain unanswered at the time of publishing.
On June 13, Minister of Petroleum and Natural Gas Hardeep Singh Puri assured India has adequate energy supply for the coming months, as tensions rise in the Middle-East region.
Experts fear tensions between Iran and Israel might result in supply disruptions if attacks intensify further.
“The cost for OMCs would definitely go up if the ships are re-routed, insurance costs would rise; all of this will add to higher transportation costs. The crude prices jumped from $65 (a barrel) to around $74-75 (a barrel) the moment the war begun. So, people are anticipating possibility of disruption in supplies,” said Nitin Tiwari, research analyst at PhillipCapital.
Also Read: Iran-Israel conflict: Crude surge, threat to shipping lanes keeping oil refiners on the edge
On June 16, Brent crude futures was trading around $75 a barrel, while US West Texas Intermediate crude futures rose to $74 per barrel. Crude oil prices were hovering in the range of $65-70 a barrel prior to the tensions between Iran and Israel.
Elevated crude prices squeeze Indian oil refiners’ margins, as they have largely kept retail fuel prices unchanged in the domestic market despite volatility in the international market.
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