The rising tensions in the Middle East as Israel attacks Iran’s energy infrastructure have sent crude oil prices to two-month highs over the last week. Worries also loom over potential risks to shipping routes in the region, directly affecting Indian energy supplies as New Delhi sources a significant portion of crude oil and liquefied natural gas (LNG) from the Middle East nations.
As Israel intensifies attacks on Iran’s military and nuclear facilities, Tehran is considering closing the Strait of Hormuz, a key shipping route in the Middle East region, said Al Jazeera citing Iranian news agency IRINN. Most recently, Israel launched airstrikes on Iran’s most vital oil and gas facilities.
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.
Moneycontrol takes a closer look at the significance of the Strait of Hormuz to the Indian oil and gas sector.
Why is the Strait of Hormuz important?
The Strait of Hormuz, located between Iran on one side and Oman on the other, is a narrow albeit strategic trade route which connects the Persian Gulf with the Gulf of Oman, extending onward to the Arabian Sea.
The Strait of Hormuz, described as the most strategically important chokepoint, is only 33 km wide at its narrowest point and is the only sea passage from the Persian Gulf to the ocean.
About 20 percent or one-fifth of the total global oil output passes through the strait, linking major crude producers in the Middle East with key markets worldwide, especially Asia. It is also the route for around a quarter of the global LNG trade.
Any disruption or closure of the Strait of Hormuz could lead to an extraordinary spike in crude oil and LNG prices, higher shipping costs and delays in supply.
“The Israel-Iran conflict seems to be getting worse. There is a risk of a supply-side shock in crude as the conflict intensifies. Key shipping lanes such as the Strait of Hormuz, Suez Canal and Bab El Mandab could get impacted,” said IFA Global in a note on June 16.
How does it affect India?
India is a net importer of crude oil, with over 40 percent of its supplies sourced from Middle East nations such as Iraq, Saudi Arabia, the United Arab Emirates, Kuwait and Qatar. These countries export crude oil and LNG to India through the Strait of Hormuz route.
India is a highly price-sensitive market as the country imports around 90 percent of its crude oil requirements. Supply delays from the Middle East region or higher transportation costs would adversely impact the health of Indian oil marketing companies (OMCs), which distribute petroleum products such as petrol, diesel, LPG, etc, in the country. State-run OMCs include Indian Oil Corporation Ltd (IOCL), Bharat Hindustan Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL).
“Oil traffic through the Strait of Hormuz has never been closed, but that does not mean that it can never happen. Nevertheless, shipping costs (for OMCs) would go up even if they do not have to re-route supplies, in ways of insurance costs. Higher crude oil prices will also impact the companies,” said Nitin Tiwari, research analyst at PhillipCapital.
Amid escalating tensions between Iran and Israel, Minister of Petroleum and Natural Gas Hardeep Singh Puri on June 13 assured that India has adequate energy supplies for the coming months.
Indian oil refiners have tie-ups for crude oil supply for the coming three months, while the country also maintains strategic oil reserves for emergency situations. India’s total oil reserves stand at around 74 days, where IOCL inventory is for 40-42 days, the government’s special purpose vehicle, Indian Strategic Petroleum Reserves Ltd, holds reserves for over 9 days, and the rest is maintained by BPCL and HPCL.
Has Iran ever closed Hormuz?
Historically, Iran has never closed the Strait of Hormuz despite several threats over the years. Tehran’s threats of shutting the shipping route have primarily been considered rhetoric, only to create pressure amid conflicts.
Tehran has not been able to shut the route entirely even during the most intense wars in history including the Iran-Iraq conflict during 1980-1988. This is because the route is also Tehran’s lifeline as the country exports oil to China, which consumes almost 80 percent of Iranian oil, through the Strait of Hormuz.
“There is a huge upside risk to crude price if Iran is able to disrupt crude supply through the key Strait of Hormuz via which 20 percent of global oil and LNG shipments take place. The probability of this, though, is low; the Strait of Hormuz has never been blocked during earlier wars in the region, and its blocking is extremely unlikely this time as well, as the US and Western countries are likely to take strong measures against any such disruptions, given the huge risk it can pose to global oil and gas prices and, hence, inflation,” said Dayanand Mittal, research analyst at JM Financial.
Iranian oil exports have mostly been directed towards China since the 2019 sanctions imposed on Tehran by US President Donald Trump in his first term. Supply disruptions in Iranian oil exports could further add $5-$10 per barrel to crude oil prices, according to experts. Iran produces almost 3 percent of the total global oil output.
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