Does an oil shock loom as US-Iran face off?

The fear of an oil shock looms large as crude surged towards $70 a barrel in London after a Donald Trump-ordered airstrike in Baghdad on Friday killed Iran’s top general, Qassem Soleimani.

The US action ratcheted up tensions in the world’s most important crude-producing region, with the threat of major oil supply disruptions becoming very real.

Oil prices jumped more than $3 a barrel as Iran’s leader Ayatollah Ali Khamenei promised “harsh revenge” and said Soleimani’s death would double the resistance against the US and Israel.

An oil price spike is a cause of worry for big consumers and importers such as India, which gets the bulk of its crude supplies from West Asia, particularly Iraq and Saudi Arabia.

The country’s top refiners such as Indian Oil Corporation and Mukesh Ambani’s Reliance Industries Ltd source crude mainly from these two countries.

Impact on Indian basket

The price at which Indian refiners buy crude had come down to $65.99 a barrel on January 2. But with the global prices again surging up, Indian refiners will have to pay more for their crude.

Vandana Hari, Founder and CEO of Vanda Insights, said: “The latest incident (Soleimani’s killing), irrespective of how it pans out, serves as a fresh reminder for import-dependent major oil-consuming countries such as India of the importance of keeping geopolitical threat to energy supply security squarely in view.”

According to her, there are no easy or quick solutions. “It is time that India, along with other Asian powers, upped their diplomatic outreach — individually or as a group — to Iran, the US and the other main actors in the Middle East to help find a solution. This elevated threat of major oil supply disruptions around the world is the new normal and underscores the urgency for diversifying energy resources and building a buffer through strategic stockpiles.”

Kabir Taneja, Fellow and Head of West Asia Initiative, Observer Research Foundation, said, “I think oil will see a spike, and will remain jittery if this escalates and in what manner it escalates.

“Iran may have overplayed its hand with the recent storming of the US embassy in Baghdad and the attack on the US base in Kirkuk. In all of this and its upcoming aftermath, the region will get more tense without a doubt.”

“...For India which hedged its oil bets from Iran to Iraq due to sanctions, this could get precarious. However, much of Iraq’s oil is in its southern parts that have remained largely peaceful with supplies unaffected even during the most troubled times,” he argued.

Taneja said that he presumed that India factors in the faultlines in West Asia in its risk assessment regularly. “However, a prolonged oil price spike will certainly hurt the Indian economy significantly which is already slowing down.”

Tame statement from Delhi

The Ministry of External Affairs reacted to the developments tamely, with a statement that said: “We have noted that a senior Iranian leader has been killed by the US. The increase in tension has alarmed the world. Peace, stability and security in this region is of utmost importance to India. It is vital that the situation does not escalate further. India has consistently advocated restraint and continues to do so.”

While crude spiked immediately after the US action and Iran’s retaliation threats, some observers feel that the US may not want oil prices to surge beyond a point as 2020 is a presidential elections year.

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