Israel-Hamas War Could Increase Costs For Indian Refiners

Brent crude oil prices may cross the psychological $100 per barrel mark once again now that Israel has declared war against Hamas, putting pressure on refineries' costs.

An increase in crude oil prices will be directly proportional to the escalation in the conflict, according to energy experts. Iran's support for Hamas and its purported involvement in its strike on Israel may lead to retaliation by Israel and a reimposition of financial sanctions on Iran by the U.S.

Iran at present produces 3–4 million barrels of crude oil per day, depending on global demand, which could face potential restrictions or lead to increased insurance costs for importers, said Sumit Pokharna, vice president and analyst at Kotak Securities Ltd.

The increased price would mean higher costs for Indian refiners, who have until now enjoyed huge discounts from Russia. "The supplies to India won't get affected as it secures no oil from Israel or Iran, but the discounted price from Russia would be at elevated levels now," Pokharna said.

India at present sources over 85% of its crude oil requirements from Russia, Iraq, and Saudi Arabia, and natural gas from Qatar and Oman.

The potential restriction on supplies of over 3.5 million barrels per day of oil from Iran is expected to be met by the surplus of other OPEC+ countries, according to the experts. There is every possibility of other large countries like Russia and China getting involved in the current global bipolar geopolitical scenario. It was recently witnessed in the escalated Ukraine war, when Europe and the U.S. supported Ukraine and China aligned with Russia.

"With this conflict being in the Middle East, the potential ramifications become even more severe," said Ashwin Jacob, partner at Monitor Deloitte.

The possibility of Iranian barrel supply being restricted is being considered very seriously by all market participants. However, it is expected that other OPEC+ countries may step in to cover any shortfalls, with some price increases in the short term, Jacob said.

"The industry, however, is monitoring closely to see if there are chances of this spinning out of control into a more global and bipolar geo-political scenario, as was the case in the Ukraine conflict," Jacob said.

"Such a situation may lead to crude reaching in the vicinity of the psychological $100 per barrel mark. From an Indian perspective, refiners are definitely expecting higher costs, which may result in pressure on the downstream companies to pass that on, with a resultant impact on inflation in the country and the world at large," he said.

Even if Iran manages to supply oil to favouring countries such as China, the cost of insuring the supplies will increase, making it challenging and unviable for both parties, he said.