Will The Iran War Have A Lasting Impact On Energy Prices?

While conflicts before the 90's created lasting structural dislocations, in recent times, energy markets have adjusted quickly to the impact of war, making the impact lasting no longer than a couple of months.

The global oil market was in excess supply prior to the war. Above-average stocks also reduces the possibility of structurally higher energy prices, according to a NIrmal Bang report. 

Asia, primarily China and India, are vulnerable to Middle Eastern supply cuts and blockages in the Strait of Hormuz.

Meanwhile, “India has to some extent reduced dependence on crude oil imports from the Middle East with increasing sourcing from Russia, but is still overwhelmingly dependent on the Middle East for gas imports (over 90% of LPG imports),” it noted. 

"Opening up of the Strait of Hormuz is more crucial than a ceasefire, as far as energy markets are concerned," the brokerage firm noted.

The rise in risk premium and supply chain disruptions may keep crude oil prices elevated in the near term, according to Nirmal Bang.

Will Corporate Profitability Take a Hit?

The most recent experience of the Russia-Ukraine crisis suggests that higher crude oil prices will likely impact margins with a lag of one quarter. Materials (chemicals, paints, metals, and cement) will likely see the biggest impact on margins drawing from the lessons of 2022 followed by energy, utilities, and consumer staples.

In contrast, healthcare, communication services, and industrials were not significantly impacted. Consumer discretionary (includes auto) also witnessed limited impact on margins.

Also Read: Mukesh Ambani-Led Reliance Denies Reports Of Buying Iranian Crude

How Will India’s Macro Stability Be Impacted?

A US$10/bbl increase in crude oil prices pushes up the CAD by ~0.4% of GDP. “With an increase in our crude oil price assumption from US$65/bblto US$80/bbl for FY27 our CAD estimate has been revised up to 1.6% of GDP from 0.9% of GDP previously,” it noted. 

“Our USD-INR forecast for FY27 also stands revised to 93.8 on average from 91 earlier on a higher CAD and a persistent balance of payments deficit. While remittances are more diversified with rise in share of the US and UK, the Middle East which accounts for ~39% of remittances, remains a risk. A 10% increase in crude oil prices with full pass-through can push up CPI inflation by 35-45bps,” it added. 

However, the brokerage house does not expect any “material increase in CPI inflation as retail petrol and diesel prices are unlikely to be increased at least in the near term”. 

“We retain our CPI forecast at 4.3% for FY27,” it noted.