What is the significance of Strait of Hormuz?
According to S&P Global 20.8 million barrels of oil and products transit the Strait this year. 15.4 million barrels per day is crude oil. Over 80 per cent of oil transiting the Strait goes to Asian markets. About 18 per cent of world liquefied natural gas (LNG) transit the Strait, with over 80 per cent of that volume going to Asian markets.
What is the impact from the escalating Middle East tensions and reported closure of Strait?
According to Bloomberg NEF, it poses a direct threat to around 14 million barrels per day, or 32 per cent of global seaborne crude oil, that flows through the Strait of Hormuz. For oil products, any Strait of Hormuz disruption would impact 16 per cent of the global products trade, with severe consequences for LPG (liquefied petroleum gas) and naphtha. Strait of Hormuz transit volumes are about 1.5 million barrels per day (b/d) for LPG and 1.2 million b/d for naphtha. 300,000 barrels per day of Jet fuel flows to Europe transiting through the Strait. Naphtha flows to East Asian crackers are particularly exposed, with more than 37 per cent of those global seaborne volumes transiting the strait.
What will be the impact on India?
Bloomberg NEF said it poses a specific threat to India, which relies heavily on Middle Eastern LPG for residential use. Replacing these short-haul cargoes with longer voyages of LPG from the US would present a severe logistical challenge for countries in Asia. Crisil Intelligence said the developments could increase pricing and procurement risks for crude oil and LNG posing substantial challenges for India, which has more than 85 per cent and 50 per cent import dependency respectively. Strait of Hormuz is vital for almost half of India’s imports of both commodities, thus increasing vulnerability. If disruptions persist, shipments may be rerouted via the Cape of Good Hope, lengthening transit times and increasing the cost along with rising freight and insurance premiums.
India Ratings and Research said it does not foresee an immediate supply shock, as most corporations have adequate inventories. However, it said if the Strait of Hormuz were to close for an extended period, it could lead to increased costs for fuel, freight, and insurance, longer transit times, and affect the margins and working capital of Indian corporations involved in international trade.
What can be other impacts on India?
India’s export exposure to the Middle East is relatively modest, with the Gulf Cooperation Council (GCC) countries accounting for only 13 per cent of exports, India Ratings said. These exports are primarily concentrated in gems and jewellery, mineral fuels, electrical equipment, and industrial machinery. On the import side, goods from GCC countries make up just 16 per cent of India’s total imports, mainly consisting of crude oil, natural gas, gold, and diamonds. The primary consequence of these tensions is an increase in crude oil and other petroleum product prices. Although petrol and diesel prices are deregulated, it is unlikely that oil marketing companies will immediately raise these prices, thereby insulating inflation from the rise in petrol and diesel costs. However, increases in gas prices could affect fertilizer prices and, consequently, the fertilizer subsidy. The Indian Rupee may weaken further as the proportion of GCC in India’s remittances is highest, and a prolonged period of conflict may impact remittance inflow into India. The short-term impact would be increase in commodity prices and some supply disruption. Overall, the impact depends on how long conflict will continue”, according to Dr. Devendra Pant, Chief Economist, India Ratings. Rising commodity costs impacting corporate profit and loss statements could affect sectors such as paints, chemicals, aviation, and oil refineries. However, the impact on the chemical sector will depend on the specific spreads and demand-supply dynamics due to the diverse nature of chemicals. Conversely, sectors like defense may benefit from increased order flows, it said.
