New Delhi: Crude oil prices could move decisively above $100 a barrel if another 2-3 million barrels per day of oil is taken off the global market as the US-Iran conflict escalates, according to Natalia Katona, commodity analyst at Oilprice.com.
The warning comes as Brent crude prices rose 1 percent to settle at $95.63 a barrel on Wednesday, after a volatile session driven by renewed military strikes between the US and Iran. US West Texas Intermediate crude also rose 0.9 percent to settle at $91.01 a barrel, according to Reuters.
Gulf producers exported around 18 million barrels per day (b/d) of crude before the crisis, with almost 16 million b/d moving through Hormuz. In August, total Gulf exports—including oil moved through pipelines, ship-to-ship transfers and conventional tanker traffic—were running at only around 9 million b/d.
“If another 2–3 million b/d is taken off the market, Brent could move decisively above $100 a barrel,” Katona told ThePrint.
She added that part of the latest increase in prices was due to a geopolitical risk premium, which could disappear quickly if Washington and Tehran step back from further escalation.
But she said the oil market was no longer dealing only with geopolitical uncertainty. “This is no longer just a geopolitical risk premium. The physical market is already tight,” Katona said, pointing to a fall of around 410 million barrels in observed oil inventories since the war began and an expected global supply deficit of 1.8 million b/d in the third quarter.
The latest escalation has renewed concerns about oil supplies from the Gulf, particularly as shipping through the Strait of Hormuz remains severely disrupted. US forces carried out strikes along Iran’s southern coast, while Iran responded with attacks on American military positions in the region.
It has disrupted shipping through the Strait of Hormuz, a key route for global energy supplies that accounted for roughly one-fifth of oil before the war.
Gulf exports are now roughly half their pre-war level, while a significant share of the remaining flows depends on alternative arrangements that could be vulnerable to further escalation.
The next major risk for the oil market is whether Washington continues to block Iranian crude from leaving the Gulf. If that continues, Tehran could have little incentive to allow the movement of oil from other producers through the Strait of Hormuz, Katona said.
She predicted that the realistic expectation is for Brent to trade in the high $80s to mid $90s with prices to remain above $100 per barrel only if there is a serious escalation.
India faces pressure if high prices persist
For India, which imports close to 90 percent of its crude oil, the impact of higher prices would be felt through the trade balance, the rupee, inflation and economic growth.
Higher crude prices will increase its import bill and dollar demand. “If crude prices go above $90/bbl for a sustained period of time, the rupee will retain a weakening bias because oil importers need more dollars,” Katona said.
Aashi Gupta, associate fellow at the Indian Council for Research on International Economic Relations (ICRIER), said India could absorb crude prices in the $90-100 range for several quarters, given its strong foreign exchange buffer and domestic demand.
“If crude averages closer to $90, the economy can probably absorb the shock reasonably well given the strength of domestic demand.”
The risks would become more significant if crude remains around $100 for several quarters. While the initial impact would be felt through fuel and transportation costs, a prolonged oil shock could raise input and logistics costs across the economy and feed into core inflation, she said.
The bigger concern, she asserted, would be second-round effects if persistent inflation begins to influence wage and price-setting behaviour.
Higher oil prices would also keep pressure on the Rupee, although India’s large foreign-exchange reserves and the RBI’s willingness to intervene could provide a buffer.
Over the longer term, however, India would need to reduce its dependence on imported energy, strengthen export competitiveness and improve its trade balance, Gupta said.
The impact on economic growth would depend on how long crude prices remain elevated. If oil stays around $100 for several quarters, the combined effect of higher inflation, a wider trade deficit, rupee pressure and weaker consumption and investment could weigh on growth.
In such a scenario, growth could moderate to around 6.5-7 percent rather than remaining close to 8 percent, Gupta said.
(Edited by Tony Rai)
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