Crude oil flow from Middle East may be at risk
October 25, 2023 08:46
The entire flow of crude oil from Iraq, Saudi Arabia, and the United Arab Emirates (UAE) -- among the largest sources of imported oil for India -- may be at risk if Iran attempts to block the Strait of Hormuz in the wake of the conflict between Israel and Hamas, senior officials of state-run oil-marketing companies and refineries told Business Standard.
Overall, more than half of the crude oil bought by India passes through the strait, which is also the primary shipping route for oil from Kuwait, Oman, and Qatar, they said. As much as 56 per cent of the crude oil imported by India in value terms came from these countries in FY23.
"Crude flows through the strait have remained consistent until now, and they are expected to remain so if the crisis in Israel does not escalate. But in the event of Iran getting drawn into the conflict, it could become complicated. Any incident in the strait can disrupt shipping flows, and that will raise the cost burden for us," a top official from BPCL's Kochi refinery said.
In July this year, Iran and US navies had a standoff at the chokepoint after international tankers were fired upon by the Iranian navy.
Connecting the Persian Gulf to the Gulf of Oman and wider Arabian Sea, the strait is considered one of the most important naval chokepoints in global maritime shipping.
The 167-km-long strait has a width varying from about 96 km to as little as 39 km, and separates Iran on the north coast from the Musandam peninsula on the south coast, which is shared by the UAE and Oman.
Estimates suggest that 88 per cent of all oil leaving the Persian Gulf goes via the Strait of Hormuz. In 2018, its daily oil flow averaged 21 million barrels per day, or the equivalent of about 21 per cent of global petroleum liquids consumption, according to the US Energy Information Administration (EIA). The daily flow has consistently risen from 16 million barrels per day in 2009-10.
According to the EIA, 76 per cent of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets, including India, in 2018.While the currently affected regions do not produce oil, the conflict in Israel and the Gaza Strip has raised the geopolitical risk premium on oil, resulting in rising prices, Prashant Vasisht, senior vice president and co-group head (corporate ratings), ICRA Limited, said. "However, if the conflict spreads, supplies may be affected as the Middle East region produces almost a third of the global supplies.
Higher crude oil prices would lead to an increase in the import bill and the current account deficit. The prices of feedstocks for a host of chemicals, including specialty chemicals, would increase and long-term LNG (where linked to crude oil prices) cost would rise,' he said.For India, the bigger headache would be liquified natural gas (LNG), nearly 80 per cent of which originates in Qatar and nearby countries. The EIA calculates that more than one-quarter of the global LNG trade also transited the strait in 2018."
-- Subhayan Chakraborty/Business Standard
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