India’s crude oil import bill is under renewed strain, as the Indian crude oil basket moves to $115.98 per barrel and international crude prices surge amid rising Middle East geopolitical tensions. The latest shock to crude prices has also seen the banks HSBC and Goldman Sachs, among major financial institutions, revise their forecasts for Brent crude oil upwards.
Brent crude has moved past the critical psychologically significant $100 per barrel mark, as concerns grow over supply disruptions through crucial shipping channels. This is a key development for India, which is a major crude oil importer, as high international crude oil prices are detrimental to inflation, the currency and India’s trade balance.
Indian crude basket climbs sharply
A close measure of how much India really pays for crude oil imported is measured by the Indian crude basket. India’s crude oil basket has climbed to $115.98 per barrel- highlighting just how much the global oil shock is starting to affect India’s costs.
This development happens at a time when crude oil in the international market remains extremely volatile. Brent crude crosses the $100 mark as escalating geopolitical tension between US and Iran, attacks on energy infrastructure and shipping, add to supply concerns.
For India, a major consumer with almost 80 per cent of its crude oil requirement met by imports, high crude oil prices are a matter of serious economic concern.
Why crude prices in Brent are firming
The key factor causing this fresh rally is an elevated risk of disruption of oil transportation through the Strait of Hormuz, considered among world’s most significant energy corridor.
Oil flows through Strait of Hormuz has reportedly dropped considerably to pre-war levels. There is fear among market participants that further escalating of military tension will restrict flow of crude and refined products.
Escalating recent attack between shipping vessels, is also of major concern. Analysts believe the more duration this particular disruption remains, the higher is probability for a sustained premium being attached to crude oil price.
HSBC revises its forecast for Brent crude
HSBC has raised the forecast for crude Brent, taking into account possible further extension in disruption of the flow of crude into the global market. The forecast estimates that the market will likely remain volatile, if crude flow through Strait of Hormuz remains depressed. In the much tougher scenario, if supply disruption would continue for an extended period of time crude prices would be pushed higher.
This indicates the general direction among financial institutions worldwide in factoring the extended geo-political instability into forecasts of crude prices.
Goldman Sachs warns about the possibility of $120 crude oil
The investment banking major has warned of significant upside risks to crude prices and feels Brent crude may reach $120 per barrel, with intensifying crude oil pipeline disruptions and continued escalation of crude oil vessel attacks on crude producing Middle East regions. At the same time, Goldman Sachs sees a comparatively low oil price scenario should oil flows get back to normal. Therefore, it is quite evident that future of crude prices will continue to depend significantly on the span and magnitude of the geopolitical disruption.
How crude prices going up impacts India:
The increasing crude oil price has significant ramifications for the economy due to its heavy dependence on importing energy, and continued rise can increase a country’s import bill and add strain on the current account balance. The increasing crude prices can also impact India’s rupee negatively by adding a need for the US dollar demand that is utilized to pay for energy imports. Inflation is also seen to take a hit as a result of rise in crude prices that could lead to rise in transportation costs and ultimately prices across economy. Nevertheless, Indian domestic petrol and diesel prices are not immediate response to international crude oil prices as companies have the ability to compensate with margins and other factors including taxation have influence over retail prices.
Indian equities impacted by rising crude prices:
The rise in crude oil is becoming an influencing factor in Indian equity markets. Industries highly dependent on fuel and transportation can be impacted by the ever increasing price of fuel, whereas oil producing companies can make huge gains from increasing oil prices. Indian equity markets have witnessed decline and were pressured already after Brent oil crossed $100. On the tenth of September equity markets across India were down in response to geopolitical turmoil as a whole with higher crude prices fueling concern about their possible impact on inflation and economic activity.
What to monitor going forward:
Key areas to monitor in global oil markets will be unfolding events in the Middle East and Strait of Hormuz, and swiftness of return to normalized oil shipment. While crude oil Brent price could maintain its footing above $100/barrel even increase to $120/barrel should the supply disruption get severe, a marked de-escalation coupled with restoration of normal shipment would have the opposite impact on prices bringing it down on removal of geopolitical risk. In India, it will be crucial to observe closely on inflation, Indian rupee, and retail fuel prices and their corresponding influence in India’s financial policy. The investors may wonder whether the sustained price at India’s crude basket of $115.98 per barrel would result in only short term fluctuations or an extended energy price shock impacting India’s economy.
