Oil prices may surge as Hormuz threat looms after US attack on Iran

The US bombing of Iran’s nuclear sites has led to a widening of the Israel-Iran war and a further escalation in geopolitical tensions that could lead to a surge in global oil prices, which have already shot up by close to 20% this month. 

The benchmark Brent crude futures were trading at around $77 a barrel, and the market is reported to be bracing for another spike in prices with the US having stepped into the Middle East conflict.

A wider Middle East conflict is expected to have an impact on oil supplies from Saudi Arabia, Iraq, Kuwait and the UAE, which would lead to a sharp spike in the prices. Shipping could also get hit as the Houthi rebels have already warned that they would resume their attacks on ships if the US attacked Iran.

India imports around 85% of its crude oil requirement, and a surge in oil prices can lead to an increase in its oil import bill and push up the rate of inflation, which can hurt economic growth. The larger outflow of foreign exchange can also lead to a weakening of the rupee vis-a-vis the US dollar.

The Hormuz threat

According to a report by Emkay Global, Iran produces around 3.3 million barrels per day (mbpd) of crude oil (3% of global) and exports around 1.5 mbpd, with China being the main importer (80%), followed by Turkey. Iran is also on the northern side of the Strait of Hormuz/Persian Gulf through which 20mbpd+ of oil trade flows from countries such as Saudi Arabia and the UAE. In the past, Iran has warned of blocking this route.

However, with OPEC+ announcing another higher-than-expected production hike in July, fundamentally oil markets remain well supplied and further Iranian supply cuts can be accommodated, the Emkay report states.

As far as the impact on the Indian economy is concerned, the report states: “As of now, we are not changing our forecasts and continue to see CPI inflation undershooting RBI’s estimate of 3.7% to average much lower 3.3-3.4% in FY26. We note that every $10/bl increase in oil leads to an annualised gain of 35 bps in CPI inflation.

Emkay Global said it maintains FY26 CAD/GDP at 0.8%, at Brent 70/bbl, with every 10$/bbl leading to upside risk of 0.4-0.5%, other things remaining equal.

“Our energy team maintains a positive view on India’s oil market companies on the back of strong marketing margins and core GRMs (gross refining margins), also holding up to $75/bbl Brent for the remaining part of the year, the report added.

Over 85 per cent of India’s crude oil needs are met through imports, positioning the country as the world’s third-largest oil importer.

“Geopolitical instability, especially in chokepoints like the Hormuz Strait and Suez Canal, threatens consistent crude supply and pricing,” said the report by the PHD Chamber of Commerce and Industry (PHDCCI).

Currently, India’ domestic oil and gas production is centred in Assam, Gujarat, Rajasthan, Mumbai High and the Krishna Godavari Basin.

(This story was taken from a syndicated feed and was only edited for style by Gujarat Samachar Digital team)