How the Iran Crisis is Impacting India's Oil Prices: What You Need to Know

India Faces Oil Price Fluctuations Amid Iran Tensions

New Delhi: Analysts predict that India will experience fluctuations in oil prices and broader economic impacts due to the escalating crisis in Iran. However, they note that the country's oil supply chain is not currently facing structural vulnerabilities.

The rising tensions in the Strait of Hormuz, a crucial transit route for a large portion of India's crude and LNG imports, have already driven Brent crude prices to a seven-month peak of USD 73 per barrel. This situation adds a geopolitical risk premium to global energy markets, intensifying inflation and current account challenges, even though immediate physical supply disruptions are not anticipated.

According to Sumit Ritolia, Lead Research Analyst at Kpler, the initial effects of the current escalation are expected to be price-driven rather than volume-driven. The geopolitical risk premium is likely to elevate Brent prices, along with increases in freight rates and war-risk insurance costs.

Even without physical shortages, the cost of imported crude for Indian refiners is expected to rise. This will lead to increased import expenses for India, potentially creating macroeconomic pressures, although physical availability is likely to remain stable in the short term.

Aditi Nayar, Chief Economist at ICRA, emphasized that the evolving situation in West Asia will significantly influence India's macroeconomic factors, including the effects of fuel prices on inflation and the twin deficits, as well as remittances.

Prashant Vasisht, Senior Vice President at ICRA Ltd, stated that the ongoing conflict in the Middle East and reported attacks on oil producers are likely to heighten volatility in crude oil prices.

The Strait of Hormuz is a vital global energy chokepoint, with nearly 20% of the world's petroleum liquids and LNG shipments passing through it. Given that Iran and several Middle Eastern energy producers are located near this route, any escalation in regional conflict could disrupt energy shipments.

Vasisht noted that any attacks on oil and gas production facilities of other major Middle Eastern producers would further heighten supply concerns. Crude oil prices have surged from around USD 65 per barrel to USD 72-73 per barrel in recent days, reflecting the rising geopolitical tensions.

A prolonged or expanding conflict involving multiple oil and gas producers, along with disruptions at the Strait of Hormuz, could negatively affect global crude oil and LNG supplies, potentially leading to further increases in global energy prices.

Data from Kpler indicates that approximately 2.5-2.7 million barrels per day, or about 50% of India's crude imports, pass through the Strait of Hormuz, primarily sourced from Iraq, Saudi Arabia, the UAE, and Kuwait.

In recent months, India's reliance on Middle Eastern oil has grown as refiners have shifted away from some Russian supplies. Consequently, the proportion of Gulf-origin crude in India's import mix has increased, making it more sensitive to any disruptions in Hormuz transit.

While extreme outcomes may be factored into pricing, Kpler's base case does not predict a prolonged full closure of the Strait of Hormuz.

More likely scenarios include temporary slowdowns, rerouting, or increased maritime security checks.

A sustained blockade would significantly impact the export revenues of regional producers, creating strong economic disincentives. Thus, while volatility risks are heightened, the likelihood of a structural and prolonged supply loss remains low.

India has diversified its crude sourcing to include Russia, the United States, West Africa, and Latin America. However, crude from the Atlantic Basin typically involves longer shipping times—25-45 days compared to about 5-7 days from the Gulf.

While diversification ensures supply continuity, it also entails higher freight costs and longer supply chains. Therefore, Middle Eastern crude continues to hold a logistical advantage and is crucial for India's supply stability.

Kpler's tracking shows that Russian cargoes are still available in the Indian Ocean and Arabian Sea, including volumes in floating storage.

If Middle Eastern supplies tighten, Indian refiners could quickly revert to Russian grades.

The presence of 'oil on water' near Indian ports offers near-term supply flexibility and commercial adaptability. This flexibility acts as a buffer against temporary disruptions in the Gulf.

In a contingency scenario, multiple inventory layers provide resilience. India's Strategic Petroleum Reserves (SPR) would likely be utilized if necessary, while refiners maintain operational crude stocks to cover short-term gaps. Additionally, depots, ports, and refining systems hold inventories of essential petroleum products—such as diesel, gasoline, ATF, and LPG—that can be strategically managed during disruptions.

From a domestic pricing perspective, Ritolia does not foresee an immediate rise in retail fuel prices by Oil Marketing Companies (OMCs) in the short term. Although fuel pricing is deregulated, adjustments typically follow sustained crude price increases rather than temporary volatility. The government is expected to monitor developments closely to mitigate inflationary risks.

India's recent shift back to Middle Eastern crude has heightened its short-term exposure to risks associated with Hormuz. Any escalation would likely first manifest through increased prices, freight, and insurance costs, with an outright supply shock being unlikely at this stage.

While temporary disruptions cannot be dismissed, the probability of a prolonged full blockade remains low. Diversified sourcing, options from Russia, and layered inventory buffers—including SPR and commercial stocks—significantly reduce the risk of sustained physical shortages. Thus, the primary near-term vulnerability lies in price volatility and macroeconomic impacts, rather than structural supply insecurity.

Vasisht noted that while Indian refiners could source crude oil from alternative locations such as the United States, Africa, and South America, high energy prices could lead to increased import bills. Additionally, sustained elevated crude oil prices are expected to compress marketing margins and profitability for oil marketing companies.