How Middle East Tensions Could Impact India's Trade and Oil Prices

Impact of Middle East Conflicts on Trade

New Delhi: Experts predict that escalating tensions in the Middle East, particularly due to military actions by the US and Israel against Iran, are likely to disrupt trade operations. This situation could lead to increased freight and insurance costs, delays in cargo deliveries, and a rise in global oil prices, ultimately inflating India's import expenses.

Despite a decline in trade with Iran over the years due to sanctions, India's commerce with Gulf nations such as Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE has seen significant growth.

Industry analysts believe that ongoing regional tensions will have adverse effects on India's trade activities.

Reports indicate that Iran has halted traffic through the Strait of Hormuz, a critical passage for a substantial portion of India's crude oil and LNG supplies from Iraq, Saudi Arabia, the UAE, and Qatar.

Approximately 35-50% of India's crude oil imports and a considerable amount of LNG shipments traverse this vital route.

"Any disruption in this area would lead to increased freight and insurance costs, delays in shipments, and a spike in global oil prices, which would directly elevate India's import expenses," stated the Global Trade Research Initiative (GTRI).

In response, refiners might consider rerouting shipments through pipelines to Red Sea ports, sourcing oil from Russia, the US, West Africa, and Latin America, or tapping into strategic petroleum reserves to mitigate short-term impacts. However, these alternatives could also raise costs and extend transit times.

"The repercussions will be felt globally, not just in India. Nearly 20% of the world's oil and a significant portion of LNG trade passes through the Strait, with most shipments heading to Asian markets, including China, Japan, and South Korea," remarked GTRI Founder Ajay Srivastava.

He further noted that disruptions in the Strait of Hormuz pose a threat to a large share of India's crude oil and LNG imports, leading to increased freight costs, insurance premiums, and fuel prices. A rise in global oil prices could also exacerbate the current account deficit and fuel inflation.

The Strait of Hormuz is a narrow 33-kilometer channel linking the Persian Gulf to the Arabian Sea.

Trade expert Biswajit Dhar echoed these sentiments, stating that shipping lines are already feeling the effects of the conflict, which will impact Indian exporters.

"Oil prices could soar to USD 120-130 per barrel, significantly increasing our import bill and potentially harming inflation," he warned, adding that prolonged tensions could also affect remittances.

Additionally, this situation may hinder ongoing free trade agreement (FTA) negotiations with the Gulf Cooperation Council (GCC).

India has recently initiated FTA discussions with the GCC, which comprises six Gulf nations: Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain.

Around 10 million Indians reside and work in the GCC region.

India has already established a free trade agreement with the UAE in May 2022 and signed a Comprehensive Economic Partnership Agreement (CEPA) with Oman.

In the fiscal year 2024-25, India's exports to the GCC increased by approximately 1% to USD 57 billion, while imports surged by 15.33% to USD 121.7 billion.

Bilateral trade rose to USD 178.7 billion in 2024-25, up from USD 161.82 billion in the previous year.

The UAE was India's third-largest trading partner in the last fiscal year.

Rafeeq Ahmed, a leading leather and footwear exporter, expressed concerns that rising oil prices would elevate input costs for exporters.

"We are hopeful... if this situation persists, it will not bode well for us," Ahmed stated.

Following the US and Israel's attacks, Iran retaliated with military strikes targeting several American bases in the Middle East, including locations in Qatar, Kuwait, and the UAE.

SC Ralhan, President of the Federation of Indian Export Organisations (FIEO), noted that the ongoing conflict has already begun to disrupt established global logistics networks.

Air routes are being modified, and maritime trade through the Red Sea and key Gulf straits faces increased uncertainty. If these diversions continue, shipments may increasingly need to reroute via the Cape of Good Hope, adding an estimated 15-20 days to transit times for Europe and the US, Ralhan indicated.

In 2024, tensions in the Middle East following the Israel-Hamas conflict affected the transportation of goods from India via the Red Sea route, forcing shippers to take longer paths to reach destinations in the US and Europe.

The Bab-el-Mandeb Strait is a crucial shipping lane connecting the Red Sea and the Mediterranean Sea to the Indian Ocean.

This route begins from major Indian ports like Mumbai, JNPT, or Chennai, heads westward through the Arabian Sea, enters the Red Sea, and navigates through the Suez Canal into the Mediterranean Sea. From there, ships can access various European ports based on their destinations.

The Cape of Good Hope route, while longer and slower, avoids potential delays or disruptions in the Suez Canal. It is typically utilized for bulk cargo shipments, where time is less critical or when political instability in the Middle East raises concerns about using the Suez Canal.

India's exports saw a slight increase of 0.61% to USD 36.56 billion in January, while the trade deficit widened to a three-month high of USD 34.68 billion.

Imports surged by 19.2%, reaching a three-month high of USD 71.24 billion in January, driven by a significant rise in gold and silver shipments due to higher prices.