The West Asia war and the resultant closure of the Strait of Hormuz—currently without an end in sight—is turning out to be a lot more disruptive for global oil flows than initially anticipated, raising concerns all over the world, particularly for large oil importers like India.
This crisis is a serious headache for India, the world’s third-largest consumer of crude oil, with an import dependency level of close to 90%, making the economy and the country’s forex reserves vulnerable to oil price shocks. About 40% of the country’s oil imports used to come via the Strait of Hormuz.
While the country has managed to secure adequate crude oil volumes from non-Gulf suppliers and has not faced any oil supply disruption, Indian refiners have been paying for the oil through their nose, spending valuable foreign exchange. Given the severity of the impact and the uncertainty over how long the crisis could last, Prime Minister Narendra Modi recently appealed for conservation of petroleum fuels, among other measures, aimed at moderating imports and foreign exchange outgo.
The Strait of Hormuz—the narrow waterway between Iran and Oman—is a critical maritime chokepoint that accounted for about a fifth of global oil flows before the West Asia war began on February 28. Since then, vessel movements through the strait have been effectively halted, leading to an unprecedented energy supply crisis.
Situation worse than anticipated earlier
According to the latest assessment by the US Energy Information Administration (EIA), West Asian oil producers Iraq, Saudi Arabia, Kuwait, the UAE, Qatar, and Bahrain collectively shut in 10.5 million barrels per day (bpd) of crude oil production in April, up from 8.9 million bpd in March.
The EIA has also revised upwards—by 19%—the estimated West Asia oil production shut-in for March from its earlier estimate of 7.5 million bpd. The estimated production shut-in in April is a little over 10% of the global liquid fuels consumption.
Moreover, in the latest edition of its Short-Term Energy Outlook, the EIA has forecast that global oil inventories will decrease by 2.6 million bpd this year; this is significantly higher than the 0.3 million bpd the EIA had forecast last month. The latest forecast assumes that the Strait of Hormuz will remain effectively closed until late May, with shipping traffic beginning to pick up in June. If the de facto closure of the strait lasts longer, the forecast would most certainly worsen.
Although a fragile ceasefire has been in place in the region for a few weeks, the strait remains effectively closed, with daily vessel transits now in single digits from an average of over 130 a day before the war started. The strait’s closure has dragged on for a lot longer than initially anticipated, and there is still no clarity on when normal traffic will resume through the waterway.
Along with tighter energy supplies and surging prices, the uncertainty is leading to growing anxiety. The longer this crisis stretches, the greater will be the negative impact on supplies, as global drawdowns from stored oil inventories will also begin to come under pressure. All this would lead to even higher energy prices, although some demand destruction is also expected.
According to the EIA, the spot price of benchmark Brent crude increased sharply in April, reaching a high of $138 per barrel on April 7 and averaging $117 per barrel for the month, 65% higher than the February average of $71 per barrel. This monthly average price is also the highest since June 2022, following Russia’s invasion of Ukraine.
The EIA now expects Brent prices at around $106 per barrel in May and June. Based on its assumed timeline for the opening of the strait, the EIA expects crude oil prices to fall thereafter, dropping to an average of $89 per barrel in October-December, and $79/b in 2027. These estimates can change drastically if the underlying assumptions change.
India growing headache
Asia, including India, has particularly suffered due to supply disruptions and price surges because of the West Asia war. New Delhi depends on imports to meet over 88% of its crude oil needs, over 40% of which came via the Strait of Hormuz. The country depends on imports to meet half of its natural gas requirement, with about 60% coming through the strait. As for liquefied petroleum gas (LPG), the import dependency level is 60%, and 90% of those imports came through the maritime chokepoint.
Heavy dependence on energy imports has led to a double whammy of supply tightness and price surge. While highly diversified crude sourcing has helped in ensuring adequate oil, petrol, diesel, and jet fuel availability, some rationing of gas supplies to certain industries and commercial consumers was done in order to ensure adequate availability for households and a few priority sectors.
The surge in international prices of oil and gas has forced India to import oil and gas at extremely high rates, as supply security had to be prioritised over price considerations. Moreover, oil companies are incurring high additional costs due to emergency sourcing and a surge in shipping and insurance rates, among others. And the longer this continues, the worse off India will be from various economic standpoints.
Given that India imports 1.8-2 billion barrels of crude oil a year, every $1-per-barrel increase in oil prices bumps up the country’s oil import bill by up to $2 billion on an annualised basis. According to a March report by Nomura, India is among the three most vulnerable Asian economies to high oil prices in terms of import bill and current account balances, the other two being Thailand and South Korea.
It also said that every 10% oil price increase typically widens India’s current account deficit by 0.4% of the GDP. Crude oil alone is the country’s largest merchandise import. According to Petroleum Ministry data, crude oil imports in 2025-26 stood at over $123 billion. If oil prices sustain at $100 per barrel in the current financial year and import volumes don’t decline, the oil import bill could be upwards of $200 billion for the year. Led by the PM, the government has appealed for fuel conservation. While it may lead to some moderation in oil consumption, a substantial chunk of oil demand is seen as inelastic.
Amid the crisis, the government has slashed excise duty on petrol and diesel by Rs 10 per litre, and oil marketing companies (OMCs) have not raised pump prices despite incurring heavy losses on the sale of the two fuels at pre-war levels amid a surge in oil and fuel prices in the international market. They are absorbing heavy under-recoveries on sale of LPG to households and jet fuel for domestic flights, where only a fraction of the price hike has been passed on.
The excise duty cut is likely to lead to a revenue loss of over Rs 1.6 lakh crore to the government, while the OMCs are cumulatively incurring daily losses of Rs 1,000 crore. On Tuesday, Petroleum Minister Hardeep Singh Puri said that the fuel retailers’ combined loss for April-June—pegged at Rs 1 lakh crore at current price levels—could wipe out their annual profits for 2025-26 (FY26).
Puri also said that the government will have to take a view at some point on how long the OMCs can continue to suffer losses by selling major fuels below market price. Although a full pass-through of high international fuel prices to domestic consumers could stoke inflation.
The South Korean-operated vessel HMM NAMU is docked after being damaged from a fire following an explosion in the Strait of Hormuz, at a port in Dubai, United Arab Emirates, Friday, May 8, 2026. (AP)
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