US-Iran conflict may spike India’s crude prices and fuel inflation

Escalating tensions between the United States and Iran over stalled nuclear negotiations have once again heightened geopolitical risks in global crude markets. Recent warnings from US leadership about possible military action after Iran allegedly crossed key American “red lines” triggered a sharp rally in crude prices, with WTI jumping more than 5% as markets reacted to the possibility of a broader confrontation. This renewed uncertainty has raised concerns about potential supply disruptions and their impact on major crude-importing economies, particularly India.

Significance of Strait of Hormuz

The Strait of Hormuz sits between Iran to the north and Oman/UAE to the south. Although it does not run through Iranian territory, the strait directly borders Iran’s coastline, giving Tehran significant strategic influence. Most commercial shipping lanes lie within Omani territorial waters, but portions fall under Iran’s jurisdiction, enabling Iran to exert pressure when tensions rise. Historically, Iran has threatened to disrupt traffic by conducting naval drills, deploying military vessels, laying mines, or harassing oil tankers—tactics seen during earlier regional confrontations. Although Iran cannot legally shut the strait entirely, even limited obstruction could severely disrupt global oil flows.

The strait’s relevance becomes critical during periods of escalating U.S.–Iran tensions because nearly 20% of the world’s petroleum liquids and almost 30% of seaborne crude oil pass through this narrow waterway every day. With few alternative routes available for Gulf exporters, global energy supplies remain highly vulnerable to any disruption. Even the threat of a blockade or increased military movement often triggers immediate price volatility.

A complete shutdown remains a low-probability scenario due to a strong U.S. naval presence and Iran’s own dependence on the strait for exporting crude. However, temporary interruptions or heightened military activity can still elevate war-risk insurance premiums, slow tanker movement, and push oil prices upward.

Countries Likely to Be Adversely Impacted

Major crude importers such as India and China would be among the earliest and most affected. Both economies rely heavily on supplies from the Gulf region, and any perceived threat to uninterrupted shipping can trigger short-term spikes in domestic fuel markets. This trend mirrors previous periods of Middle Eastern instability, where fears of supply disruptions drove temporary oil price surges even when physical flows remained largely intact.

These price shocks, however, are often short-lived. Once diplomatic channels re-engage or confirmation emerges that shipping lanes remain operational, markets typically retreat, easing part of the geopolitical risk premium.

Impact on India’s Crude Oil Prices

If a military conflict between the United States and Iran erupts, the immediate impact on India would be a rapid rise in crude oil prices due to concerns over potential supply disruption through the Strait of Hormuz. A sudden spike in global crude benchmarks would raise India’s import costs and push up domestic crude and fuel prices. Such geopolitical shocks also heighten speculative activity in oil futures, with crude derivatives witnessing increased trading volumes as traders attempt to hedge against volatility. Broader markets may remain steady during such episodes since the risk is mostly concentrated within the energy complex.

If higher crude prices persist, the effect will extend beyond the oil market. Increased petrol and diesel costs typically translate into higher transportation and manufacturing expenses, raising inflationary pressures within the Indian economy. The longer global benchmarks remain elevated, the greater the potential for sustained inflationary impact.

Alternative Sources

In a worst-case scenario involving disruption in the Strait of Hormuz, India has the advantage of diversified sourcing. Over recent years, India has increased crude imports from countries such as Russia, the United States, Brazil, and West African producers. This diversification helps buffer risks associated with Persian Gulf tensions. The government has also signalled its readiness to rely on strategic petroleum reserves and explore additional non-Gulf suppliers if required. Other measures could include reducing refined product exports to prioritise domestic fuel availability and using alternative ports or supply routes where feasible.

Overall, while the geopolitical bias currently leans toward higher crude prices, the extent and duration of this rise will depend largely on whether the Strait of Hormuz experiences meaningful and sustained disruption. In the absence of an actual supply shock, any price rally is likely to be temporary and driven mainly by sentiment rather than structural supply constraints.

(The author is Head of Commodity Research, Geojit Investments)