As West Asia flares up, what's in store for India's energy security?

Whenever a conflict breaks out in the Middle East, something that potentially could turn into a war with lasting consequences, the first thing the world dreads is the impact felt in the energy sector, particularly oil.

A major disruption in one of the key propellers of the global economic engine could trigger a global economic recession in no time and the latest conflagration that began on Saturday (February 28) has heightened that tension again.

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As Israel and the US jointly attacked Iran, apparently to stop it from becoming a nuclear state, and killed its supreme leader Ali Khamenei, and the Iranian side also retaliated, both militarily and strategically by closing down the key sea route of the Strait of Hormuz, concerns have also been raised in India whether this could adversely affect matters related to oil trade and the overall economy.

The country has already faced challenges from the US over buying crude from its old ally Russia in the wake of the Ukraine war. Could it afford to meet another major challenge now?

No immediate disruption for India in oil, say analysts

Officials and analysts have said that India is unlikely to face any immediate disruption in oil supplies despite the escalating tensions around Iran and the Strait of Hormuz but cautioned that higher crude prices and broader macroeconomic pressures could be expected in the near term.

According to them, the country’s refiners currently hold sufficient crude inventories to meet at least 10 days of requirements, with fuel stocks covering another five to seven days, cushioning the adversity of any short-duration disruption.

Also read: When missiles fall in the Gulf, why Kerala holds it breadth

Despite the swiftly evolving events in West Asia creating geopolitical uncertainty, contingency plans are established, which include engaging diversified suppliers from the US, West Africa, Latin America, and even Russia, along with utilising strategic reserves, they said.

Hormuz closure unlikely to be long, feel experts

Analysts do not expect the Hormuz route to remain shut for a long time, as influential regional powers such as Saudi Arabia and Qatar would be hit economically in such an eventuality and resort to decisive action to end the logjam there.

“In case Iran were to force the closure for long, the possibility of a military action by the US and other powers in the region to physically take control of the coastal belt from where the Islamic Revolutionary Guards Corps (IRGC) exercises control of the sea lane, cannot be ruled out,” an analyst was quoted as saying by news agency PTI.

Also read: Why did Iran bomb its neighbours? Do Dubai, Abu Dhabi have US military bases?

However, while a short-lived disruption may have limited supply impact in India, the immediate fallout is expected to be reflected in oil prices. Brent crude closed near seven-month highs at around $73 per barrel, up more than $12 per barrel year-to-date as geopolitical tensions grow.

Traders are modelling increased volatility, with certain scenarios suggesting a price of $80 per barrel if supply chains encounter significant threats.

LNG, LPG trade could face impact

In case of LNG, however, the situation is not as assuring. While near-term supplies are secured, a prolonged closure of the Strait of Hormuz may see India fast running out of alternatives. The reason being: unlike crude oil, most LNG volumes are locked in long-term contracts, and only limited volumes are available in the spot or current market, another official told the news agency.

Close to 60 per cent of India's LNG imports and almost all of its LPG shipments pass through the Strait, underscoring its significance to India's energy security. The LPG situation, hence, also faces similar concerns.

Aditi Nayar, Chief Economist at ICRA, said the extent and duration of the West Asia conflict will determine its impact on India's macroeconomic indicators, including inflation, fiscal and current account balances, and remittances.

Also read: Stock market worries mount amid escalating West Asia crisis

Sumit Ritolia, Lead Research Analyst, Refining and Modelling at commodity market analytic firm Kpler, told PTI, “India's recent pivot back toward Middle Eastern crude has increased its near-term exposure to Hormuz-linked risks. Escalation would most immediately manifest through higher prices, freight and insurance costs and also at last outright supply shock (as of now, the probability of supply/production reduction is low).”

Experts have, nevertheless, aired caution that the rising tensions in the Middle East could disrupt trade flows, increase freight and insurance costs, delay cargo shipments and push global prices up, thereby adversely impacting India’s import bill. The free trade agreement (FTA) talks with the GCC (Gulf Cooperation Council) could be slowed down.

Also read: War on Iran delivers a body blow to already battered Indian airlines

India has recently started FTA negotiations with the GCC bloc, which includes six countries from the region.

Price of precious metals may surge

Precious metal prices are likely to see a fiery start to the week when trading resumes on Monday (March 2), as investors would rush for safe-haven assets amid global uncertainties following the escalation of the Middle East tension, analysts said.

According to them, the extent of the impact on domestic silver and gold prices will depend on how long the conflict persists, as global investors recalibrate risk exposure amid fears of a prolonged instability in the Middle East.

(With agency inputs)