India Grapples with Oil Shortages as Energy Costs Climb
Surge in Crude Oil Prices Amid West Asia Tensions
On Friday, crude oil prices experienced a significant increase, with Brent crude approaching $78 per barrel. This surge is primarily attributed to rising tensions in West Asia and concerns over potential supply disruptions from the critical Strait of Hormuz, a key passage for global energy transportation. This abrupt rise in prices represents a formidable challenge for India.
Impact on India’s Energy Supplies
The prices of crude oil escalated sharply on Friday, with Brent fluctuating near $78 a barrel before stabilizing, creating potential difficulties for India’s energy resources and leading to a possible price shock. India is reliant on imports for up to 88% of its crude oil demands, much of which transits through the insecure Strait of Hormuz. Additionally, the nation imports about 50% of its natural gas, predominantly from West Asia.
Iran’s Role in Global Oil Supply
Iran produces approximately 3.3 million barrels of crude oil daily, accounting for roughly 3% of the global supply and exporting around 1.5 million barrels each day, with China being the foremost importer (80%), followed by Turkey. Situated on the northern side of the Strait of Hormuz, Iran has previously issued warnings about potentially obstructing this route, through which over 20 million barrels per day of oil traverse.
Consumer Sentiment and Market Projections
Despite the Organisation of the Petroleum Exporting Countries (OPEC) signaling intentions to boost production, analysts predict that Brent crude prices might remain around $70-72 per barrel in FY26. Prashant Vasisht, senior vice president at Icra, pointed out that approximately 20% of the global oil and LNG trade passes through the Strait of Hormuz, underscoring the high risk of supply shocks with any escalation in conflict. “Given that loading ports are situated in the Strait of Hormuz and with no alternate arrangements for many of these supplies, the risk escalates dramatically if tensions intensify,” Vasisht remarked.
Economic Implications for India
Amit Kumar, a partner at Grant Thornton Bharat and the energy & renewables industry leader, highlighted that even minimal direct imports from Iran may lead to significant global price hikes due to the conflict, thus increasing India’s oil import expenditures. Historically, Iran has threatened to blockade the Strait, which could severely disrupt oil shipments. “Furthermore, potential supply interruptions and geopolitical tensions may elevate freight and insurance costs, adversely affecting refining and marketing firms’ profitability. Lastly, in case of supply interruptions, refiners might need to explore alternative sources for crude oil,” Kumar added.
Effects on Various Sectors
Naveen Vyas, senior vice president at Anand Rathi Global Finance, noted that Iran’s approximately 9% of the world’s oil reserves means that any disruptions could have pricing implications, thereby challenging oil marketing companies, paint manufacturers, automobile, and cement sectors. “These industries might witness decreased demand or increased margin pressures if tensions escalate and persist for more than 3-6 months, particularly if Brent crude prices breach the $82-85 per barrel threshold,” Vyas stated.
Market Reactions and Export Performance
On Friday, shares of state-owned upstream firms Oil and Natural Gas Corp (ONGC) and Oil India saw intraday gains, while shares of oil marketing companies fell sharply. ONGC and Oil India witnessed increases of 1.45% and 2%, respectively, whereas Bharat Petroleum, Indian Oil, and Hindustan Petroleum experienced declines of 1.9%, 1.78%, and 1.41%, respectively. data from Kpler revealed that India’s petroleum product exports rebounded in May to 1.34 million barrels per day, marking a 31% increase from 1.02 mbd in April. Kumar emphasized that more than 50% of India’s crude oil imports have come from West Asia in recent years.
Diversifying Oil Sources
However, in 2023, nearly 40% of India’s crude oil needs were satisfied by imports from Russia alone. “As a result, should supply disruptions occur, India maintains the flexibility to adjust and diversify its energy sourcing strategy,” Kumar noted. Furthermore, Madhavi Arora, chief economist at Emkay Global Financial Services, expressed that an extensive conflict in West Asia affecting supplies from Saudi Arabia, Iraq, Kuwait, and UAE could trigger dramatic spikes in oil prices. “Amidst the US-China trade tensions, although China continued to procure from Iran despite Western sanctions, reports indicated a reduction in their intake in recent months,” Arora added.
