Energy prices surge, India faces oil supply challenge – Economy News

Crude oil prices jumped sharply on Friday, with Brent hovering around $78 a barrel before cooling a bit, posing a challenge to India’s energy supplies and a potential price shock.

India imports as much as 88% of its crude oil requirements — much of it through the vulnerable Strait of Hormuz. The country also imports nearly 50% of its natural gas consumption, a large portion coming from West Asia.

Iran produces around 3.3 million barrels of crude oil a day, around 3% of global supply and exports about 1.5 million barrels a day, with China being the main importer (80%) followed by Turkey. Iran is on the northern side of the Strait of Hormuz or the Persian Gulf through which over 20 million barrels per day of oil trade flows. In the past, Iran has warned of blocking the route.

While the Organisation of the Petroleum Exporting Countries (OPEC) has said it will raise output, experts believe prices of Brent crude could nonetheless rule at $70-72/bbl in FY26.

Prashant Vasisht, senior V-P, Icra, said that 20% of world oil and LNG trade is transported via Strait of Hormuz, which Iran straddles. As such, any escalation of the conflict result in supply shocks. “As loading ports are on the Strait of Hormuz with no alternative arrangements for most of these supplies, the risk is high in case the conflict escalates,” Vasisht told FE.

Amit Kumar, partner and energy & renewables industry leader, Grant Thornton Bharat, pointed out that even if direct imports from Iran are minimal, global price spikes due to the conflict would push up India’s oil import bill. In the past, Iran has warned of blocking the route which could potentially hurt oil flows.

“Additionally, potential supply disruptions and geopolitical crises can increase freight and insurance costs affecting the profitability of refining and marketing companies. Moreover, in the event of supply disruptions, refiners may need to seek alternative sources of crude oil,” Kumar said.

Naveen Vyas, senior vice-president, Anand Rathi Global Finance, noted that with Iran holding about 9% of the world’s oil reserves any disruption could impact prices posing a challenge to oil marketing companies, paint manufacturers, automobile and cement industries.

“These sectors may experience demand slowdown or margin pressures if tensions escalate and persist for more than 3-6 months, particularly if Brent crude prices rise above the $82-85 per barrel mark,” Vyas said.

Shares of state-owned upstream companies Oil and Natural Gas Corp (ONGC) and Oil India rose intraday on Friday, while those of the oil marketing companies fell sharply. The ONGC and Oil India shares closed higher by 1.45% and 2%, respectively, while Bharat Petroleum, Indian Oil and Hindustan Petroleum fell 1,9%, 1.78% and 1.41%, respectively.

India’s export of petroleum products in May bounced back to 1.34 million barrels per day, up 31% from 1.02 mbd in April, according to data from global real-time data and analytics provider Kpler. In recent years, more than 50% of India’s crude oil imports have originated from West Asia, Kumar highlighted. However, in 2023, nearly 40% of its crude oil requirements were met by imports from Russia alone. “Consequently, in the event of supply disruptions, India has the flexibility to adjust and diversify its sourcing mix,” he said.

Madhavi Arora, chief economist, Emkay Global Financial Services, wrote on Friday that a wider West Asia conflict, impacting supplies from Saudi, Iraq, Kuwait and UAE, can lead to sharp spikes in oil prices. “With the US-China trade conflict, China did not adhere to western sanctions on Iran but continued to buy buying the same though in the last few months it was reported they reduced intake,” Arora said.

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