We have already covered the US-Iran-Israel conflict, here’s its last and one of the most practical “tel.”
Yes, it’s the tale of “tel.”
The price of crude oil rose around 9% in response to military operations conducted by Israel and the US against Iranian targets, and the obvious retaliation by Iran, resulting in growing concerns regarding supply disruptions across Western Asia.
Despite the increase in global prices, sources within the Indian government informed the PTI that it is unlikely to make any adjustments to domestic petroleum price levels over the short time frame.
India, as the world’s third-largest consumer of crude oil, will now find itself in a precarious position where it must measure factors associated with increasing inflationary pressures, maintaining energy security, and dealing with domestic political considerations.
Brent’s Approach to $80 is Alleviating Fears about Supplies
On Tuesday, Brent crude reached near $80 per barrel (it reached $77.82 briefly) following a rapid increase from $67.00 this past Friday. Similarly, US crude futures increased to $72.79 or nearly 8.6% due to gagan-choomti anxiety regarding potential disruptions of energy supplies caused by escalating tensions in Western Asia; analysts caution that this anxiety could increase if the closure of the Strait of Hormuz continues!
Wood Mackenzie believes that if tanker movement through the Strait is impeded, the price of oil could be higher than $100 a barrel. The firm called the circumstance a “double supply shock.”
It is a real “kyu, hila daala na” situation for crude oil.
They indicated that at this time, current exports from tankers moving through the strait have ceased and that OPEC+ additional production and OPEC’s general spare capacity (usually used to keep the markets steady) have become inaccessible with the strait’s closure.
Wait, what’s the Strait of Hormuz?
The Strait of Hormuz is the most important chokepoint of energy movement throughout the world. One-third (approximate) of all seaborne crude oil exports move through the Strait and around 20% of LNG shipped globally travel through this narrow waterway.
According to media reports, the conflict has been crucial in forcing the closure of movement through the Strait of Hormuz. If this closure persists, shipping companies will be required to reroute their vessel traffic through Cape of Good Hope; prolonging their transit times dramatically, as well as adding significantly to their freight and insurance costs.
Moody’s Analytics has indicated that closing the Strait will increase the prospect for further interruptions to the Middle East and Red Sea region. According to the firm, the closing of air space has intensified the challenges facing passenger transport as well as cargo heading through one of the world’s most strategic trade corridors.
Will Indian prices hike?
A PTI report stated that petrol and diesel prices in India will continue to remain stable over the immediate future, despite recent price increases for crude oil.
The Indian Government will continue to adhere to a pricing philosophy based on the careful management of pricing factors. Oil companies create profit when the price of crude is low, but they also share the burden with customers when the price of crude goes up.
Pump prices for petrol and diesel have remained unchanged since April 2022. During that period, state-owned oil companies (IOC, BPCL, and HPCL) have persevered through periods of high crude prices, taking losses; however, they were able to generate profit when the prices dropped.
The stability of domestic pump prices will continue to be maintained regardless of the fluctuations of international fuel prices. Likewise, there has been no corresponding reduction in pump prices for petrol or diesel when crude prices fall internationally.
Sources expect the government will continue to protect consumers from price increases unless there is an unusually large increase in crude prices.
Financial Cushion for Oil Companies
Sources from the oil industry are reporting that oil companies have an adequate financial cushion to manage the current spike in prices.
One source stated, “The oil companies have more than enough cushion to support this level of price rise.” This source went on to state, “We’ve seen prices go as high as USD 119 per barrel in June 2022, right after Russia invaded Ukraine. They had nominal profits that year, but they made record profits of Rs 81,000 crore in FY24.”
The three oil companies reported profits of Rs 23,743 crore in the December 2022 quarter alone. Therefore, oil companies have the ability to absorb temporary fluctuations without immediately passing price increases onto consumers.
LNG risks
Analysts warn that while the supplies of crude may be adequate in the near term, suppliers of LNG may face limitations.
Analysts, including Crisil Intelligence Director Sehul Bhatt, have said that developments in the Middle East might raise the risk of higher pricing and procurement of crude oil and LNG.
“If the geopolitical concerns ease, we can expect prices to average USD 65-70 in CY2026; however, if the conflict continues, prices could potentially increase substantially.”
Iran supplies roughly 4.5% to 5% of the required volume of crude oil globally; however, the more significant issue is access to the Strait of Hormuz, where crude oil and liquefied natural gas (LNG) are crucial sources of energy for almost half of India’s imports.
Bhatt said, “Sustained disruptions will keep crude oil prices high, and limit LNG supply, highlighting the need to plan strategically to ensure India’s energy security.”
The majority of LNG is sold under long-term contracts. Consequently, spot market availability is relatively limited, as sustained disruptions could create tighter supplies and increase procurement costs.
Hear from the government
As jerking tensions across West Asia increase, Minister of Oil Hardeep Singh Puri held meetings with senior officials in the ministry and executives from government-owned oil companies to discuss the current status of crude oil, liquefied petroleum gas (LPG) and their other petroleum products.
The Ministry released a post on Twitter stating, “We are vigilant and closely watching the current situation and all measures will be taken to ensure that all of the major petroleum products will be accessible and affordable to the people in the country.”
Additionally, political ramifications must be taken into consideration. Assembly elections are being conducted throughout key political states such as West Bengal, Tamil Nadu and Assam. Policymakers are concerned about triggering public dissatisfaction through increased fuel prices.