US-Iran conflict: Price concerns grow over US threat of sanctions on Iraq

The price of Brent crude oil touched $70 per barrel intraday on Monday after the US threatened to impose sanctions on Iraq, too, for its Parliament asking the American military to leave the country after it killed top Iranian general, Qasem Soleimani, in Baghdad. Any such move by the Donald Trump administration could lead to supply disruptions in the global market.

The increase in the global oil price over the weekend has affected retail prices of automobile fuels, with petrol in Delhi touching a 13-month high on Monday, at Rs 75.69 a litre — up from Rs 75.54 a litre on Sunday. Diesel jumped to Rs 68.68 a litre, from Rs 68.51 a litre on Sunday. 

India’s imports from Iran has already gone down to 1.7 million tonne (mt) in the current financial year, from 23.9 mt in 2018-19.

However, an escalation of military conflict in Iraq could put that country’s 4.6 million barrels per day (mpd) of crude oil production at risk which may have the twin effects of jeopardising crude oil supplies to India and increasing crude oil prices globally, said a report by ICRA. And if Iran responds by blocking tanker movements in the Strait of Hormuz, oil prices may jump further.

“As a growing economy, we will continue to be dependent on crude oil imports. The volatility in prices cannot be predicted and our imports will remain high. The focus should be on how to de-risk ourselves against this, through measures like best-in-class crude sourcing and contracting, strategic reserves and demand management,” said Anirban Mukherjee, partner and director, Boston Consulting Group (BCG). 

The ICRA report said crude oil also found support from a sharp drop in the US inventory. “The arrival of shale had played a balancing act in crude oil prices for the last three years. The role of geopolitical factors was subdued because of this,” said P Elango, MD, Hindustan Oil Exploration.

ICRA said the increase in international oil prices is a credit negative for the Indian economy, given that every $1 a barrel rise increases the country’s import bill by $1.4 billion. On the other hand, every $10 a barrel increase in crude oil prices increases the fiscal deficit by about 0.1 per cent of the GDP.

But, higher crude prices may lead to a better realisation by upstream firms. 

“While the marketing profitability of PSU oil-marketing companies could be under pressure in the near term, their credit profile is expected to remain stable because of low but improving refining margins, rising share of profits from petrochemicals and gas, besides moderate level of debt leading to healthy credit metrics; as regards the upstream companies, their credit metrics are expected to remain solid,” said Prashant Vasisht, vice-president and co-head, corporate ratings, ICRA.

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