Iran-Israel conflict: Oil, LNG prices may rise if Tehran blocks Strait of Hormuz

Oil and LNG prices are likely to shoot up if Iran is to block Strait of Hormuz, through which countries like India import crude oil from Saudi Arabia, Iraq and UAE, leading to a spike in inflation, analysts said on the Iran-Israel conflict.

The Iran and Israel conflict has escalated over the last few days. Iran first launched drone and rocket attacks on Israel, which retaliated by firing a missile. Crude oil prices have hovered around USD 90 per barrel since the conflict.

In a note, Motilal Oswal Financial Services said while de-escalation efforts will likely control the crisis, oil and LNG prices will spike in case Iran completely or partially blocks the Strait of Hormuz.

The Strait of Hormuz is a narrow sea passage between Oman and Iran. It is about 40 km wide at the narrowest point, with 2 km of navigable channels for incoming and outgoing ships. It is the key route through which crude oil is exported by Saudi Arabia (6.3 million barrels per day), the UAE, Kuwait, Qatar, Iraq (3.3 million bpd) and Iran (1.3 million bpd).

Oil flow via the Strait was 21 million barrels per day or 21 per cent of global oil consumption in 2022. Also, about 20 per cent of global LNG trade moves through it, including almost all LNG exports from Qatar and the UAE.

Unlike oil, for which alternative routes via the Red Sea are available, no alternative routes are available for liquefied natural gas, it said.

India, which is more than 85 per cent dependent on overseas suppliers to meet its crude oil needs, imports oil from Saudi, Iraq and UAE as well as liquefied natural gas (LNG) from Qatar through the Strait of Hormuz.

In the event of blockade of the Strait, “we anticipate materially higher crude oil prices, refining margins, and spot LNG prices”, it said.

While alternative routes do exist, they may only be able to accommodate a fraction (around 7-8 million bpd of crude oil/refined products) of the volume currently passing through the Strait (21 million bpd), and that too at elevated freight costs.

“While investors focus on oil, we believe that spot LNG prices will witness even sharper escalation if the Strait of Hormuz is closed due to the absence of alternative routes,” it said.

Both Saudi Arabia and the UAE have alternative export routes, which avoid the Strait. Saudi Arabia has the East-West pipeline with a capacity of 7 million bpd, according to the IEA. However, this pipeline opens up into the Red Sea, where traffic flow has already been disrupted due to attacks by Houthi rebels.

The UAE has onshore oil fields linked with Fujairah export terminal with a capacity of 1.5 million bpd; however, of this, 30-40 per cent capacity is already being utilized as per the IEA.

Hardik Shah, Director, CareEdge Ratings, said the crude prices were on an increasing trend since the start of calendar year 2024. “In case the situation worsens between Israel and Iran, it may lead to a spike in crude prices.”

“However, India still has a decent share of supply of Russian crude which comprises 30 per cent of India’s total imports by end FY24, and it should help to keep India’s import bills for crude oil under check,” he said.

Moody’s Analytics in an April 15 report said the escalation of tensions in the Middle East poses a significant threat to Asia-Pacific economies. “The key risk comes from higher oil prices”.

Higher oil prices, it said, threaten to derail the region’s already choppy progress on inflation. “Most Asia-Pacific economies are net oil importers, leaving them vulnerable to global oil spikes. Impacts vary across countries, but broadly there are three main challenges from rising oil prices.

“First, they add to inflation through higher energy and fuel costs. Second, they add to the cost of production and overall transport costs, lifting prices on everything from food to flip-flops. The risk of higher food costs, via higher fertilizer, transport and seed costs, is especially worrisome because in much of Asia, it is stubbornly high food price inflation that keeps top-line consumer price indexes from retreating to central bank target ranges.”

Third, higher oil prices can push up inflation expectations, making the job of central banks even harder, it said.