The ongoing conflict between Iran and Israel has intensified in recent days and is threatening to disrupt the crucial oil and liquified natural gas (LNG) imports to India through the Strait of Hormuz. Iran has threatened to block the vital passage of sea, which can create oil/LNG supply bottlenecks for countries like India which import crude oil from Saudi Arabia, Iraq, and the UAE. The experts have warned that the development in the region may trigger volatility in Indian markets.

The Strait of Hormuz is a narrow marine corridor situated between Oman and Iran and spans approximately 40 km at its most constricted section, providing 2 km of navigable waterways for vessels entering and exiting.

India imports 85% of its crude oil requirements from Saudi Arabia, Iraq, and the UAE and LNG from Qatar. This crucial passageway is the primary route for the exportation of crude oil, facilitating the daily transport of 6.3 million barrels from Saudi Arabia, along with significant volumes from the UAE, Kuwait, Qatar, Iraq (3.3 million bpd), and Iran (1.3 million bpd).

While the oil imports can be redirected to the Red Sea route in case of disruptions, the experts were mainly worried about the LNG imports, which come primarily through the Strait of Hormuz and don’t have many alternative routes.

Motilal Oswal Financial Services “anticipate materially higher crude oil prices, refining margins, and spot LNG prices” in case the Strait of Hormuz is blocked. “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.

The crude oil prices, which are currently hovering at the level of $90 per barrel can suddenly shoot up in case the Iran-Israel tensions blow out of control. The experts sounded optimistic as the de-escalation steps are underway, but the situation is expected to remain volatile for the next few days.

Hardik Shah, Director, of CareEdge Ratings thinks India has some cushion against a sudden rise in crude oil prices as New Delhi still has a decent supply of Russian oil in its total imports. “However, India still has a decent share of the supply of Russian crude which comprises 30 percent of India’s total imports by the end FY24, and it should help to keep India’s import bills for crude oil under check,” he said.

Volatile stock markets

The Iran-Israel conflict can also combine with other major factors to increase the volatility in the Indian stock markets. Subdued Q4 earnings, selling by Foreign Institutional Investor (FII), and the planned meeting of the US Federal Reserve are going to be watched closely in the upcoming week.

“The coming week’s price action in the markets will be determined by two major factors. The US Federal Reserve’s rate-setting committee meets in 10 days for its next FOMC meeting,” said Ajay Bagga, banking and market expert.

“The second factor looming on the markets is the threat of any escalation in the Israel-Iran direct conflict after the Passover festival is over in Israel. Earnings season has so far progressed as per expectations but with both global and Indian large-cap earnings slotted for the coming week, we can expect sharp market reactions,” he added.

(With inputs from agencies)