Global markets are significantly underpricing the potential for an oil price shock, with analysts warning that Brent crude could surge to $150 per barrel if the West Asia conflict escalates, posing severe inflation risks and economic challenges, especially for import-dependent economies like India.
Key Points
- Analysts believe markets are underpricing the risk of Brent crude hitting $150/bbl if the West Asia conflict prolongs and damages oil infrastructure.
- A sustained disruption in the Strait of Hormuz could lead to a loss of 10-14 million barrels per day, a gap difficult to fill given global demand.
- For India, crude above $110/bbl makes retail fuel price hikes unavoidable, with a $150/bbl scenario requiring a Rs 26-30/litre rise.
- Elevated crude prices could trigger significant inflation and political sensitivity in India, similar to the 2011-2013 period.
- A prolonged conflict and $150/bbl crude could see Indian indices like Sensex and Nifty fall by 10-15 per cent from current levels.
Markets are underpricing oil price shock risk, suggest analysts, who see crude (Brent) hitting the $150 mark in case the West Asia war prolongs even for a couple of months and damages critical oil and gas infrastructure in the region.
Global Supply Disruption Concerns
"Options markets are actively pricing scenarios of $150 oil. Up to 20 per cent of global supply has been disrupted through the Strait of Hormuz.
"We're looking at a potential loss of 10 to 14 million barrels per day (bpd) if disruption persists in a market where global demand is just above 100 million barrels.
"That gap cannot be easily filled," said Nigel Green, chief executive officer (CEO) of deVere group, a global consulting firm that has $14 billion assets under management (AUM).
Brent crude oil prices surged over 3 per cent on Monday to $116/bbl, and have risen nearly 53 per cent since the conflict in West Asia started.
Analysts suggest that the recent price spike has been faster than previous major geopolitical crises, including the Iraq war and the Ukraine conflict.
"At the same time, political signalling is amplifying uncertainty, they added.
"Energy markets are no longer being driven purely by supply and demand. Political intent is now a central variable.
"Comments about seizing assets, restricting flows, or controlling transit routes have immediate pricing implications.
"Financial markets are beginning to react, but not fully," Green added.
Impact on India's Economy
For India, a retail fuel price hike is unavoidable with crude above $110/bbl, suggest analysts at Elara Capital.
At $125 crude, even after excise duty cut, the retail price needs to rise by around Rs 8-14/litre, they said.
"At $150, the required rise is Rs 26-30/litre.
"At that point, inflation shock would become visible and politically sensitive (seen in CY11-13)," wrote Gagan Dixit, Amogh Deshpande and Kartik Bhandari of Elara Capital in a recent note.
Liquefied petroleum gas (LPG) is the bigger fiscal pain, they said, as $1/bbl crude rise increased LPG loss by around Rs 1/kg, adding nearly Rs 33 billion to the subsidy bill. "At $100/125/150 crude, LPG under-recovery could reach around Rs 1.4/2.2/3 trillion," the Elara report said.
Market Underestimation and Potential Downturn
Jyotivardhan Jaipuria, founder & managing director (MD) at Valentis Advisors, also believes that the markets are not fully pricing in the impact of West Asia on crude oil prices.
A lot, he said, will depend on how long the war prolongs and the damage to oil and gas infrastructure in West Asia.
"A spike to $150/bbl levels is possible, but prices may cool off if the war clouds abate and the Strait of Hormuz opens.
"However, if the war prolongs and critical oil and gas infrastructure is damaged, it may keep crude prices elevated for a long time, which the markets are not factoring in right now.
"Crude at $150 levels can then be a possibility, which can see Sensex, Nifty fall 10–15 per cent from the current levels," he said.
Analysts at Macquarie expect crude to hit $200/bbl if the conflict drags on till June, with the Strait of Hormuz staying shut.
"The timing of the re-opening of the strait and physical damage to energy infrastructure are the main determinants of the longer-term impact on commodities," they said in a recent note.
G Chokkalingam, founder and head of research at Equinomics Research, sees the Sensex and Nifty fall another 10–15 per cent if the war prolongs and there is a sustained rise in crude oil prices.
"$150/bbl (Brent) is possible if the war escalates/prolongs. At these levels, there will be some demand destruction as well, which can keep prices in check," he said.
