Iran’s biggest ever military blow against Israel on Tuesday and the latter’s threat of retaliation pushed up oil prices more than 3% on Wednesday on mounting concerns that West Asia tensions could escalate, potentially disrupting crude output from the region.
Brent futures reached their highest in a month, leaping $2.42, or 3.3%, to $75.98 a barrel. Iran said early on Wednesday that its missile attack on Israel was over barring further provocation, while Israel and the US promised to strike back against Tehran as fears of a wider war intensified. “This could include damaging or obliterating Iran’s oil facilities,” Tamas Varga of oil broker PVM told Reuters.
Varga noted that a retaliation by Iran or its allies could strike Saudi oil facilities like in 2019 or see the closure of the Strait of Hormuz. “Any of these events would irretrievably send oil prices considerably higher,” he said.
In another escalation of the conflict, the Israeli military on Wednesday sent regular infantry and armoured units to join ground operations in southern Lebanon against Iran-backed Hezbollah.
For India, rising oil prices are a reason for constant worry. For every $10 increase in oil prices, India’s inflation rises by about 0.3%, while the current account deficit (CAD) widens by $12.5 billion, equivalent to roughly 43 basis points (bps) of the gross domestic product (GDP), experts estimated.
The rising hostility is also expected to push the already high logistics costs besides hurting trade in sectors such as oil, electronics and agriculture, according to exporters. They said that insurance costs for exports to the countries directly involved in the war could also go up, which will impact Indian exporters’ working capital.
Think tank Global Trade Research Initiative (GTRI) stated that the conflict is already hurting India’s trade with countries like Israel, Jordan and Lebanon.
The Federation of Indian Export Organisations (FIEO) said the Iran-Israel conflict has the potential to significantly impact world trade and the global economy in several ways.
“Iran is a key player in the oil market. Any escalation in conflict could disrupt oil supplies, leading to higher prices, which would impact global economies, especially those reliant on oil imports.
FIEO DG Ajay Sahai said increased tensions could destabilise West Asia, affecting trade routes like the Strait of Hormuz, through which a significant portion of the world’s oil passes.
“Disruptions could lead to higher shipping costs and delays. Many global supply chains depend on the stability of the region. Conflict could disrupt transportation and logistics, affecting industries ranging from electronics to agriculture,” Sahai said. Further, if the western world would put sanctions or trade restrictions, it would further complicate the global trade dynamics, he said adding “overall, the conflict could lead to increased volatility in global markets”.
Hand Tool Association chairman SC Ralhan said orders to these countries will be on hold and gradually it will be “very risky and difficult” to do trade in this region. “Insurance costs will go up or even we may not get any insurance cover in that region,” Ralhan said.
Both global and Indian traders are also bracing for a prolonged disruption in trade, as the vital Red Sea shipping route may remain inaccessible to global shipping lines for a much longer duration than previously anticipated, potentially keeping freight rates uncomfortably high.
This assumes significance for India as it relies heavily on this route through the Suez Canal for its trade with Europe, the US, Africa, and West Asia. These regions accounted for over $400 billion in FY23, according to Crisil Ratings.
The widening conflict could jeopardise the progress of the India-Middle East-Europe Economic Corridor (IMEC), which was announced last year during the G20 meeting in New Delhi.
The IMEC plan, which comprises an Eastern Corridor connecting India to the Gulf region and a Northern Corridor connecting the Gulf region to Europe, will include a railway and ship-rail transit network, as well as road transport routes. It was conceptualised to reduce dependence on the Suez Canal and create a route that could be 40% faster and was also seen as a strategic response to China’s Belt and Road Initiative.