Iran-Israel Conflict Likely to Lead to Spike in Oil Prices

New Delhi: With Israel's launch of a sweeping military operation on Iranian nuclear and military sites, global oil markets were jolted on Friday as JP Morgan has warned of a spike in oil prices. The global investment bank also said that oil prices could surge to as high as $120 per barrel if geopolitical tensions in the Middle East linger further.

With this geopolitical development, Indian oil marketing companies (OMCs) as well as other oil sectors may experience demand slowdown or margin pressure if tensions escalate. The fallout of this conflict may disrupt oil supplies from the energy-rich region, which accounts for roughly one-third of the world’s oil production. However, officials of OMCs assured that they are monitoring the situation and possible action would be taken if needed.

Oil prices reportedly jumped more than 7 per cent on Friday, trading near multi-month highs after Israel launched wide-scale strikes against Iran, sparking Iranian retaliation and raising worries about disrupted oil supplies. Brent crude futures jumped $5.1, or around 7.4 per cent, to $74.46 a barrel by 0843 GMT after hitting an intra-day high of $78.50, the highest since January 27.

As per industry estimates, India relies on imports for over 80 percent of its crude oil needs and a conflict between Iran and Israel could lead to a spike in Brent crude prices. Iran holds about 9 per cent of the world’s oil reserves, and any disruption may impact several key Indian sectors, including oil marketing companies such as BPCL, HPCL, and IOC and others, paints firms like Asian Paints and Berger Paints, as well as the automobile and cement industries.

Industry experts are of the view that rising crude oil prices are negative for OMCs like HPCL, BPCL and Indian Oil, along with others like aviation companies, paint companies and tyre stocks, as it leads to an increase in their cost, thereby impacting their margins. “Oil sectors may experience demand slowdown or margin pressure if tensions escalate and persist for more than 3–6 months, particularly if Brent crude prices rise above the $82–85 per barrel mark,” experts said.

However, OMC officials and sectoral analysts are confident that this geopolitical situation will hardly affect the Indian oil companies. “We are regularly monitoring the Middle East situations, followed by the Israel-Iran conflicts. Though it will have some global impacts, Indian oil-producing firms will be hardly affected. With even higher crude prices, we have largely kept retail fuel prices unchanged in the domestic market despite volatility in the international market,” said an official in a public sector oil firm.

“With surge in crude prices, Indian oil producers like ONGC and Oil India will remain resilient. The economic consequences of the Israeli strike can be profound if the attack and counter attack by Iran lingers long. Brent crude prices have flared up by around 12 per cent to $78,” VK Vijayakumar, chief investment strategist, Geojit Investments Ltd.