Spectre of crude at $100/barrel looming if Iran-Israel armed conflict persists

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Despite a welcome inching down of crude oil prices on Monday, April 15, experts have sounded a scare saying that if the Iran-Israel armed confrontation continues, it might push crude oil prices past the dreaded $100/barrel mark. Needless to reiterate, it’s the ultimate scare for Indian economy which imports about 85% of its crude oil requirements.

Incidentally, budget projections are usually made on the assumption of crude prices at $85 a barrel. A rise of every 10 dollars in the price of Brent is believed to expand India’s current account deficit by 0.5%.

On the morning of April 15 when trading began in Asia, crude prices registered a small decline as market participants nudged down risk premiums following Israel’s successful thwarting of Iran’s attack over the weekend. Brent futures for June delivery went down by 24 cents to $90.21 a barrel. West Texas Intermediate (WTI) futures for May delivery fell by 38 cents to touch $85.28.

Despite that initial relief, the situation in West Asia remains extremely volatile with Tel Aviv retaliating could embroil Iran, a major oil producer, into a prolonged economic disruption. However, according to media reports, US President Joe Biden has told Israel’s Prime Minister Benjamin Netanyahu that his country would not participate in any retaliatory action against Iran.

Iran launched the offensive reportedly in response to a suspected Israeli strike on Iran’s consulate in Syria on April 1. The Islamic Revolutionary Guard Corps (IRGC) confirmed the attack, stating it was aimed at specific targets.

“As Israel and Iran’s geopolitical tensions continue to escalate Following Iran’s strike on Israel, the Indian stock market might continue to be volatile. A confrontation between Iran and Israel might drive up the price of oil to more than $100 per barrel and cause panic selling and volatility in the stock market. Potential for full-blown crude oil prices is almost at six-month highs as a result of the Israel-Iran confrontation. In order to preserve market stability, OPEC extended voluntary production curbs of 2.2 million barrels per day,” Pravesh Gour, Senior Technical Analyst at Swastika Investmart told the Mint.

Manoranjan Sharma, chief economist – Informerics Ratings, also has a similar warning. “In the case of the Indian economy, this surge in oil prices would negatively impact the triple deficits of the trade deficit, current account and fiscal deficit. Since apart from macroeconomic fundamentals and the growth prospects of the firm and the industry, the capital market is also sentiment-driven, this war could negatively impact the BSE and NIFTY levels. But contrary to popular perception, extensive pessimism is unwarranted. It would be inappropriate not to factor in the strength and resilience of the Indian economy for a comprehensive assessment and perspective,” Sharma argued.

Sharma pointed out that Iran produces about 3 million barrels per day which constitutes 3% of global production. Apart from that a humongous 20% of global crude oil supply passes through the Hormuz Strait. As much as 60% of India’s crude supply passes through this strait. If armed conflict spreads in this region crude oil prices per barrel per day could rise from the present level of $91 past $100.

Incidentally, in March, the Indian crude oil basket was under $85.

Other experts though likewise and among them was Swarnendu Bhushan, co-head of research at Prabhudas Lilladher. “Iran produces 3.2 mnbopd of crude oil and also has a significant control on Strait of Hormuz which accounts for 30% of oil transit and 70% of oil shipment to Asia. Any escalation that may impact the oil production of Iran or affect the oil transit through the Strait can result in a sharp spike in oil prices. This would affect oil marketing companies negatively as they may not be able to take commensurate price hikes. For upstream companies, realization is managed through windfall taxes which may rise commensurately, and hence have no impact on upstream companies,” Bhushan told the newspaper.

The new development in West Asia could spell more than one headache for New Delhi since India shares good relations with both countries. While Israel is a trusted defence and security partner, Iran is a key crude oil supplier. Iran also shares New Delhi’s worries about terrorism, the geo-strategically significant Chabahar port and the Afghanistan situation.