US-Iran-Israel conflict: Centre keeps close eye on developments but does not foresee a significant worry in the short run

The Centre is keeping a close eye on developments around the US-Iran-Israel conflict and the impact of the potential closing of the Strait of Hormuz, a key channel for the transport of petroleum products, after the US said it had bombed nuclear enrichment sites in Iran. While global crude oil prices are set to rise, official sources have indicated that as of now, it should not be a significant worry for India in the short run.

“Crude oil prices had been lower than expected in the last few months. While prices are rising, it will not have a major impact for now. But the government remains watchful of the situation,” said a source in the know.

While the Commerce and Industry Ministry has been monitoring the impact on a potential trade disruption, the finance and the petroleum ministries are watching developments around global crude oil price movement.

India does not import oil directly from Iran but imports 80% of its oil requirements. Any significant spike in global crude oil prices has a direct impact on the trade deficit, fiscal deficit as well as wholesale inflation.

A report by Bank of Baroda pointed out that Iran is not a big player in the market with 4% share, but if the Strait is closed, then ships have to use alternative routes if at all available as over 20% of global traffic of oil passes through this strait. “Hence, a lot of West Asia crude can get held up. In such a situation there can be an artificial supply-demand mismatch leading to price increases,” it said.

The report further said that a 10% increase may not have much of an impact on the economy where the fundamentals are robust. “But if it is over $100 for a prolonged period of time it would mean virtually 25% increase over base case assumption and can have major impact on these variables,” it said.

Global crude oil prices have touched a five-month high after the US attack on Iran and Brent crude oil prices are close to $80 per barrel. The average price of India’s crude oil basket was $77.34 per barrel on June 20 and average oil prices have remained below $70 per barrel between April and June till now.

Analysts also believe that given its strategic importance, it is unlikely that the Strait of Hormuz will remain closed for long. “With about 20 mb/d of oil and 83-84 mt/year of LNG, Strait of Hormuz accounts for 27%/20% of global oil/LNG trade. It is unlikely that it will be impacted for long,” said a report by Kotak Institutional Equities.

It further said that short-term disruptions can lead to further price spikes but unless the conflict worsens and impacts the wider Middle East region, it does not see much impact on demand or supplies. “Oil prices would likely trace back if the conflict ends soon. For India, higher oil and gas prices are negative. But for upstream PSUs, these are positive,” it said.