Explainer: How will the war between Iran and Israel impact global and Indian crude prices?

With the exception of the months of January through February 2022 and June through July 2022, when the price of crude oil surpassed $100 per barrel, prices have mainly stayed in the two digit range due to ongoing geopolitical situations worldwide, such as the conflicts between Israel and Gaza and Russia and Ukraine, and the decision by some shipping companies to take a longer route because of the unrest in the Red Sea.

Following Iran’s assault on Israel, “oil prices fell on Monday as market participants dialled back risk premiums,” according to reports. Tensions between Iran and Israel caused Brent oil futures to close at $90.45 per barrel on April 12, around 1% higher.

By 1.22%, Brent was trading at $89.35 on Monday, according to Oil Price.com.

According to analysts, Iran’s assault on Israel with drones and missiles has sparked worries that it might escalate into a larger regional confrontation that would disrupt Middle Eastern oil transportation. On Sunday, Israeli Minister Benny Gantz was also cited as stating that Israel will decide when and how to strike back and “exact the price from Iran.”

The majority of the world’s crude oil reserves, according to the US Energy Information Administration, are found in areas that have historically experienced political unrest or where political events have caused interruptions to oil production.

It continues, “Several significant oil price shocks have coincided with political developments that have disrupted global oil supply. Most notably, in recent years, conflicts and political developments in the Middle East, the Persian Gulf, Libya, and Venezuela have contributed to global disruptions in oil supply that have resulted in higher oil prices.”

What impact will it have on India?

The primary factors influencing inflation and the cost of necessities are fuel costs. Despite analysts’ belief that the current war might ignite the world’s oil supply, India could escape damage until June because of the approaching general election.

“In India, domestic retail prices of gasoline, diesel, and cooking gas are likely to remain unchanged until election results are announced, but tension in supply or transit zones can precipitate an increase in the cost of transportation and insurance,” they continue.

India is especially vulnerable to changes in the price of oil since it is a net importer of crude oil.

About 85 percent of its needs for gasoline and diesel are supplied by imports.

Indian Basket crude is the term used to describe the grade of crude oil that India imports from the Persian Gulf. They clarify that it is a weighted average of the crude prices for Brent Crude (sweet) and Dubai and Oman (sour).

Growing prices for crude oil are a constant source of anxiety, according to Indian authorities.

Domination of OPEC

Despite OPEC’s dominance, the US has been a significant participant in the oil market in recent years. Analysts claim that in light of the current geopolitical and economic issues, its position as a major exporter is influencing the future of the world energy markets.

Global supply and demand determine crude oil prices, according to the EIA. One of the main variables influencing the demand for petroleum products is economic development.

By imposing production goals on its members, the Organization of the Petroleum Exporting Countries (OPEC) has the power to dramatically affect oil prices. Several of the nations in OPEC have some of the greatest oil reserves in the world. OPEC nations accounted for 37% of global crude oil production in 2021 and had around 72% of the world’s proven crude oil reserves (including lease condensate) at the beginning of the year, the report continues.

US rivalry

But in 2023, US crude oil exports broke all prior records, averaging 4.1 million barrels per day (b/d), or 13% (482,000 b/d) higher than in 2022.

With the exception of 2021, US crude oil exports have grown year since 2015, the year the US relaxed its export embargo on the majority of its crude oil. According to the EIA, this resulted in total net petroleum imports (imports minus exports) of around -1.64 million b/d, indicating that the US was a net petroleum exporter.

The US Energy Information Administration (EIA) gathers, analyzes, and disseminates unbiased, independent energy data to support sensible policy, effective markets, and public awareness of energy and how it interacts with the environment and the economy.

For more than a century, the US exported modest quantities of crude oil, even though it was a net importer of the commodity.

Although the export of crude oil was prohibited, limited shipments were permitted, mostly to Canada.

But in the last ten or so years, the shale oil boom drastically increased US oil output, which transformed the game.

“Net imports of crude oil have been steadily declining as a result of the US’s ongoing export increase. Experts argue that the shift in the OPEC-controlled market’s dynamics from low exports to a major participant in the global market was brought about by the US, and that US exports will continue to influence the market and maintain its competitiveness.