Flip-flops on Hormuz keep India refiners on the edge as crude spikes

New Delhi: India's oil import bill is back in focus after US President Donald Trump's proposal on Monday to levy a 20% fee on vessels transiting the Strait of Hormuz sent crude prices soaring, raising concerns over the country's inflation and economic growth. While Trump later dropped the fee plan in favour of a blockade targeting only ships linked to Iran, the flare-up has underscored India's vulnerability to disruptions in the energy markets. The development drove Brent crude by 5% to over $87 a barrel on Tuesday, before easing to around $85 following Trump's flip-flop.

The risks are significant for India, which imports about 90% of its crude oil requirements and spends more than $120 billion annually on crude imports. A sustained $1-per-barrel increase in oil prices raises the country's annual import bill by around Rs18,000 crore. Oil imports typically account for 17-25% of India's total annual import bill.

Indian refiners, however, are well placed to meet near-term demand, having already tied up crude supplies till August and diversified sourcing beyond West Asia. "The supply scenario is again back to what it was a month ago. Refiners had diversified oil imports, so sourcing from non-West Asian sources would continue. Now, they are aware of the situation and also the alternatives for energy supplies," said Manas Majumdar, leader, oil and gas at PwC India.

Indian refiners are prepared to meet the near-term demand, with supplies tied up till August, Mint had reported earlier.

"However, the stocks with the refiners would be lower now compared to earlier, as they did not get the required time to replenish them. If the war escalated after some few months, then it would have been a different scenario with potentially better inventories with refiners," he added.

"Compared with last year, every $10 per barrel increase in crude prices translates into roughly $42 million per day in additional crude import costs for India. While this will gradually increase pressure on oil marketing companies' marketing recoveries, the impact is expected to materialize more slowly than during previous disruptions because procurement for the near term is already largely in place," said Pankaj Srivastava, senior vice-president, commodities market - oil at Rystad Energy.

Oil supply disruptions have already driven up inflation in the world's sixth-largest economy. The wholesale price index inched up towards double-digits to 9.87% in June from 9.68% in May due to higher food and energy prices, data released on Tuesday showed.

A spike in oil prices could fuel broad-based inflation and weigh on growth at a time when the El Niño weather phenomenon and a weaker monsoon are already expected to put pressure on the economy. The Reserve Bank of India had last month lowered its growth forecast for the current fiscal year to 6.6% from 6.9%, citing rising risks from the West Asia conflict, elevated energy prices, supply disruptions and weather-related uncertainties.

At $87 per barrel, Brent crude is its highest level since 12 June, amid escalating tensions between Iran and the US less than a month after the two sides signed an interim peace agreement.

As the US and Iran trade fire, daily vessel traffic through the Strait of Hormuz has dropped sharply to about 11 from over 90 late June after the two nations had signed the agreement on 18 June.

During 10-12 July, a total of 73 vessels crossed the Strait of Hormuz, according to S&P Global Commodities at Sea. "This equates to fewer than 25 crossings per day on average and underscores the continued impact of escalating security risks on vessel movements through the waterway," it said. Total transits on 12 July fell to just 11, after Iran declared the strait closed during the day, with the Persian Gulf Strait Authority stating that passage was not possible due to recent "illegal movements of US military forces" in the region. This marked the lowest daily level since 14 June, and the first day since 12 June with no inbound crossings recorded. The latest update by S&P Global Commodities said 17 transits took place through the Strait of Hormuz on 13 July. The Strait handles about a fifth of global oil and gas supplies.

In a post on Truth Social on Tuesday, Trump changed his stance and announced that "oil is flowing like never before", and that the Strait of Hormuz "is open to ALL Ship traffic except for Iran — and that is because of their lying, violent, malicious leadership, which is taking them down the path of TOTAL DESTRUCTION". He further said there will be "a FULL Blockade, but only on Ships coming to and from Iranian ports, or carrying anything have to do with Iranian cargo".

Revoking the 20% fee proposal, he said: “Based on highly productive conversations with Middle East leadership, I have decided to replace the 20% United States Reimbursement Fee with Trade and Investment Deals that the various Gulf States will be making into the United States.”