The Iran-Israel conflict may destabilise crude oil and natural gas trade in West Asia if the Shia-majority country blocks the Straits of Hormuz, the narrow shipping passage supplying 20 per cent of the global crude oil and one-fourth of liquefied natural gas (LNG).

The fresh set of hostilities have exacerbated volatility in the markets, lifting crude oil prices to a year’s high at around $77 a barrel on Friday, from roughly $60 in early May 2025.

Brent lost some of its early gains by mid-afternoon, but was still up 7 per cent, or around $75 per barrel, early evening (India time). It traded at $74.67 a barrel at 1700 hours IST.

Government reviewing situation

Government sources said the situation is under review. Top officials are following developments and all efforts would be made to ensure supplies are not disrupted.

A trade source said crude oil prices will rise as hostilities grow, raising fears of supply-side disruptions. Besides, blockages in the Strait of Hormuz, like last year, would push up prices, freight rates and insurance premiums.

India, which imports 90 per cent of its crude oil and 50 per cent of its LNG, procures more than 40 per cent crude oil and almost half of its LNG from West Asia. An escalation in the conflict would impact supplies and prices.

The country also exports diesel to Europe; if the Strait of Hormuz is blocked, supplies would have to be routed via the Cape of Good Hope, which would extend the delivery time by two weeks and raise shipping rates.

For Iran, an extended conflict could have a bearing on the oil trade. China is a major buyer. An impact on exports or refining facilities could derail supplies, infusing volatility in global supply and consequently pushing up oil prices.

Strategic Iranian facilities such as Kharg Island (primary oil export terminal in Persian Gulf), facilities near the South Pars offshore field, or Abadan oil refinery, are a key monitorable, said another source.

Temporary disruption?

However, some analysts are of the view that disruptions, though serious, may not last long as has been the case in the past few years. A similar situation emerged in October last year, when Iran and Israel were close to a conflict and crude oil prices rose as a response, but retreated later.

Norbert Rücker, Head, Economics and Next Generation Research at Julius Baer, said geopolitics boils up once again in West Asia. The situation, of course, remains in flux and the coming days and weeks will show how far the escalation goes, what intensity the conflict builds, to what extent allies on both sides get involved, and how negotiations around Iran’s nuclear programme continue.

“Our best guess is that oil prices will follow the usual pattern around such geopolitical events, with prices rising temporarily, before returning to previous levels. The peak and duration of this pattern depends on the intensity of the conflict, but has historically averaged below 20 per cent in price gains and a length of up to three months,” he added.

Rücker said blockage of the Strait of Hormuz “remains a low probability consequence from our perspective”. The oil market overall is supply resilient today. Storage is ample in the Western world and especially in China, which has built extensive oil inventories over the past decade.

“While the situation remains in flux and unpredictable in the near term, the structural setting of the oil market should remain unscathed. We lift our 3-month price target to $72.5 (a barrel), while our view and long-term targets remain unchanged at Neutral and $60,” he added.

The development has impacted oil marketing companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation, with their shares declining on the stock exchanges.

OMCs are at risk of an erosion in marketing margins if prices rise. Every $2 a barrel rise in Brent prices eats into the margins of OMCs by Re 1 per litre for petrol and diesel.

Published on June 13, 2025