Price-sensitive, import-reliant India grapples to shore up energy security amid Hormuz crisis

India is scrambling to secure oil and gas supplies as fighting in the Gulf has disrupted shipping through the Strait of Hormuz, a vital artery that carries around a fifth of global oil and LNG trade and underpins the country’s energy security.

Tensions escalated after US and Israeli strikes on Iran prompted retaliatory attacks across the region, leading to a near halt in tanker traffic through the narrow waterway between Iran and Oman. Vessels have been struck, insurers and trading houses have suspended operations, and hundreds of tankers are reported anchored in Gulf waters.

For India, the stakes are high. Around 40-50% of the country’s crude imports — about 2.5-2.7mn barrels per day — transit Hormuz, according to Kpler. India imports more than 85% of its crude needs and processes around 5.6mn bpd. Around 60% of its LNG imports  and nearly all LPG shipments also pass through the strait.

The disruption has already rippled into domestic markets. Qatar, India’s largest LNG supplier, halted LNG output this week amid the conflict, prompting Indian companies to cut gas supplies to industrial customers by 10-30%, industry sources told Reuters this week. Indian LNG importer Petronet has informed GAIL and other buyers of lower supplies, and companies including Indian Oil Corp, GAIL and Petronet are preparing to issue spot tenders despite surging freight and insurance costs. India has only a few days of LNG supplies left if Qatari output does not resume soon.

LNG prices have also soared in the wake of the Qatari disruption, climbing by over 50% since closing price prior to US and Israel’s launch of strikes against Iran over last weekend. This puts particular pressure on price-sensitive buyers in Asia such as India, Bangladesh and Pakistan, as they will have to compete for cargoes with deeper-pocketed buyers in China, Japan and Korea. 

Natural gas plays a relatively modest role in India’s energy mix, with a share of around 6-7% today, with the government aiming to expand this to 15% by 2030 at the expense of coal-fired power. But it also plays a critical role in producing fertiliser — a critical resource in a country with over 1.4bn people eager to ensure food self-sufficiency. It is also used as feedstock in various other industrial processes. 

Crude markets have also reacted to the Hormuz disruption, with Brent closing on March 3 at over $79 per barrel,up from around $65 per barrel prior to the crisis. Analysts’ predictions on how high it would climb vary greatly, and depend on how long a blockade of the Hormuz Strait continues, projecting beyond $100 per barrel in a worse-case scenario. As is the case with natural gas, India is a price-sensitive oil market. 

Each $10 increase in crude prices would add $13-14bn to India’s annual import bill, analysts told the Times of India. The country’s total import bill in the fiscal year ending last October totalled $450bn. A 25% rise in prices could widen the current account deficit by 0.3% of GDP, lift retail inflation by around 0.7 percentage points and shave 0.2% off real GDP growth, analysts said. Higher prices would squeeze margins at state-owned oil marketing companies and raise input costs for sectors such as aviation, autos, logistics and paints, ratings agency ICRA has warned. Domestic oil producers in India would naturally benefit.

India’s government officials have stressed that contingency plans are in place. India’s strategic petroleum reserves, refinery stocks and floating inventories can cover up to 74 days of demand. This is not far off the 90-day recommendation that the International Energy Agency (IEA) makes to major oil importers. Refiners meanwhile hold around 25 days of fuel inventories. Officials say the government is exploring alternative sourcing from the US, West Africa and Latin America – but India would have to compete for these volumes with other markets that have lost out on Gulf crude. 

The government has also raised the prospect of increased Russian oil imports. While Indian buyers scaled down Russian oil imports in January under pressure from the US, Russia remains the country’s top supplier, with close to a one-fifth share of imports, and volumes averaging 1mn barrels per day in February. 

India may also be able to make use of routes by which Gulf crude can bypass the Straits of Hormuz, such as ADNOC’s Habshan-Fujairah pipeline and Saudi Arabia’s East-West pipeline to the Red Sea, though capacity is limited. At best, around 4-5mn bpd of the crude that until recently passed through Hormuz could be rerouted by these means.