Last week, oil prices jumped following Israel’s strikes on Iran. Brent crude oil soared around 7 per cent on Friday with investors worried about a potential disruption in supplies. On Monday, though, prices settled at slightly lower levels during the day, even as the conflict between the two countries continued. But with oil prices up just under $10 over the past few weeks — following US President Donald Trump’s announcement of the imposition of tariffs on most of the US’s trading partners, oil prices had plunged in April and remained subdued in May — there are concerns over rising energy costs, and the broader implications for prices across the world.
Iran is estimated to produce roughly 3.3 million barrels per day of crude oil. As per a note from BNP Paribas, a France-based bank, Iran’s oil exports have fallen to 1.6 million barrels per day (less than half of its capacity) due to existing sanctions. However, it notes that even if this supply were to be removed from the market, it could “be compensated by OPEC+ unwinding the 2.2 mbd (million barrels per day) of voluntary production cuts”. According to JP Morgan, a US-based bank, there is “more capacity” to absorb a supply shock than before. It notes that “OPEC+ has spare capacity and US production has demonstrated flexibility, largely thanks to the boom in shale fracking”. And oil demand has not been robust. In its recent oil market reports, the International Energy Agency (IEA) had noted that global oil demand growth is expected to slow down as the ongoing trade tensions “negatively impact the economic outlook” and due to record sales of electric vehicles. In a note on June 13, the IEA said that the global oil market is “well supplied”. It said that the increase in non OPEC+ supply is expected to outpace global demand.
There are concerns, however, of a deeper disruption to supplies. Fears have been raised over Iran possibly closing the Strait of Hormuz, through which a fifth of global oil supply and around 17 per cent of LNG is transported. Goldman Sachs, a US-based investment house, is said to have estimated that a blockade of this key passage could push up prices above $100 per barrel. A widening of the conflict could cause a greater price spike. JP Morgan is said to have warned about the possibility of prices rising to $120 in a worst-case scenario. For an oil-importing country like India — it imports more than 80 per cent of its requirements — disruptions in global supplies and price surges will have implications. The costs will have to be borne, though for some time prices at the pump have not reflected the sharp movements in global oil prices. High oil prices sustained over a longer period could also accelerate the switch to alternatives, giving a spur to electrification of transport.
