It is worth noting that more than 20% of the world’s oil passes through the Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Heavy missile attacks around the region have raised concerns about supply constraints, sending oil prices soaring.
US WTI rose 3.19% to $67.29 per barrel, while Brent reached $72.87 on Friday. It came ahead of a significant escalation in the Middle East conflict over the weekend, with growing concern about further violence.
Barclays oil price above $100:
Britain’s second largest bank Barclays raised its forecast for Brent crude oil futures to $100 per barrel on Saturday. “Oil markets may face their worst fears on Monday. As things stand, we think Brent could reach $100 (per barrel), as the market faces potential supply disruptions amid the alarming security situation in the Middle East,” the bank said in its report. It is worth noting that after the death of Iran’s supreme religious leader, Ayatollah Ali Khamenei, the war has increased significantly due to severe injuries all over the world.
Iran lies along the Strait of Hormuz, through which about a fifth of the world’s oil passes, Ali Waez, who heads the Iran Project at the International Crisis Group, said in a post on X: “Even a limited disruption could disrupt energy prices, oil inflation and global markets.”
The oil first acts more, then adjusts
Equirus Securities notes in its latest note that oil prices have frequently risen 25-300% during geopolitical crises, even when physical supplies have been short-lived. “The pattern is consistent: oil first overreacts, embedding geopolitical risk premiums, and then gradually adjusts to trade flows and fundamentals reassert themselves. The real forecasting challenge is not predicting the initial spike but predicting how long the turbulence and embedded premiums will last, the pattern of oil is initially called geopolitical risk premiums, and then gradually adjusts as trade flows reverse. And the fundamentals are shining through, the brokerage said, adding that the real challenge is not predicting the initial spike but how long the disruption and resulting premium will last.
“At the start of the Russia-Ukraine war, markets assumed that a long-term conflict would keep crude oil above $100/bbl and OMCs would move to damaged values. If anyone had known that the war would still be going on 4 years later, a tripling of oil would have seemed inevitable. Instead, what actually happened was, briefly after $1bl/bbl. Flows adjusted, Russian barrels returned, and fundamentals Today, crude trades are close to fundamentals and OMCs have nearly tripled their exposure to the crisis,” Equirus Securities further said.
According to the brokerage, if inflation threatens Hormuz’s key bottleneck, the premium is structural rather than proportional. “Even the risk of a partial disruption could place a $20-$40/bbl geopolitical premium, reopening the path to $95-$110+, beyond just the mechanical effects of Iran’s barrel.”
For India, which is heavily dependent on crude oil imports, the immediate result is rising inflationary pressures caused by higher energy prices, said Manurjan Sharma, chief economist at Infomerics Ratings. “Higher import costs are likely to widen the current account deficit and further push the fiscal deficit through increased subsidy obligations,” he added.
Escalating Middle East tensions raise the risks of shipping disruptions, global shipping and insurance costs, even without a full embargo, said Madhavi Arora, chief economist at MK Global Institute for Equities. “According to our preliminary checks, India’s crude and LNG supplies remain ample, and India has buffers in the form of diversified imports, strategic reserves and operational reserves, which help absorb short-term shocks,” the analyst added.
“If tensions in the Middle East continue, higher oil prices will feed directly into domestic spending and macro indicators. If the situation normalizes with OPEC+ also indicating a rapid production increase (0.4mb/d), and oil prices do not fall below $70/bbl, the macro impact could be more inclusive.” Aurora said.
Back in Dalal Street…
Shares of oil marketing companies (OMC) will remain in focus tomorrow, amid an expected rise in crude oil prices. Shares of oil refiners will likely increase, reflecting higher oil prices.
Tire and paint stocks will be key to watch tomorrow, as crude oil is a key source of raw materials for both paint and tire companies as most of their inputs are petroleum-based derivatives.
Also Read: https://economictimes.indiatimes.com/markets/stocks/news/will-sensex-nifty-react-amid-escalating-middle-east-war-after-khameneis-killing/articleshow/128909536.cms
(Disclaimer: The suggestions, recommendations, views and opinions given by the experts are their own. They do not represent the views of The Economic Times)
(TagsToTranslate) Crude Oil
