Israel’s surprise airstrikes on Iranian nuclear sites have rattled global energy markets, sending oil prices soaring amid concerns that supplies from the critical West Asia region would be disrupted.
The price of benchmark Brent crude surged by over $6 to cross a five-month high of $78 per barrel on Saturday.
Higher crude prices mean higher fuel costs and an increase in the cost of freight. The potential negative ramifications for global trade resulted in a sharp fall in US equities too.
Iran’s airstrikes on Tel Aviv only served to heighten tensions further. Experts anticipate the rise in global tensions to lead to near-term volatility. In fact, the Volatility Index or the VIX, spiked nearly 8% in trade on Friday.
While the escalation is bullish for near-term oil and gas prices, analysts at S&P Global Commodity Insights say it is unlikely to sustain price pressure unless it directly disrupts oil exports.
“The attack is obviously bullish near term for oil prices, but the key is whether oil exports will be affected. When Iran and Israel exchanged attacks last time, prices spiked, then fell once it was clear the situation wasn’t escalating and oil supply was unaffected,” Richard Joswick, head of near-term oil analysis at S&P Global Commodity Insights, told news agency ANI.
Even though India does not directly import large volumes of oil from Iran, it does import about 80 per cent of its oil requirement.
The worry for India is that the Strait of Hormuz, which is located between Iran to the north and the Arabian Peninsula to the south, remains a critical chokepoint, with nearly 20 per cent of global LNG trade and a significant portion of crude exports transiting through the narrow waterway.
Any disruption around the Strait of Hormuz, say analysts, may affect oil shipments from Iraq, Saudi Arabia, and the UAE, who are key suppliers for India. Analysts further said any disruption on the route could hurt India’s exports in terms of time as well as costs. In the past, Iran has warned of blocking the key route.
“There is a risk to LNG supply if Iran retaliates by threatening shipping through the Strait of Hormuz,” as per analysts from S&P Global Commodity Insights.
While current freight rates for Red Sea transits have remained steady, analysts say heightened conflict could reverse that trend.
“Price risk premiums tend to fade unless actual supply is disrupted,” said S&P analysts.
The longer-term impact on oil and gas markets will depend on whether the conflict escalates into a regional war or remains contained.
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 Global, a financial services provider, report states.
“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. Our estimates don’t see downside risks,” the report added.
For now, markets remain on edge, with every new development carrying the potential to tip the balance.
(With agency inputs)
