West Asia Conflict Drives Oil Prices Higher and Strains Global Supplies

The ongoing conflict in West Asia is significantly disrupting global oil supplies, pushing prices higher and threatening economies like India. The war against Iran, which began on 28 February, closed the Strait of Hormuz, disrupting 20% of global oil and 25% of LNG supplies. The conflict has since spread to the Arabian Peninsula, affecting Saudi crude exports through the East-West Pipeline, which was shut down after a drone attack on 10 September. These disruptions have caused Brent crude prices to spike to $109 per barrel, though they have since slightly dropped, remaining above $100. The Indian crude oil basket stands at $117.3 per barrel.

The potential enactment of the Graham Act by the US could further tighten supplies by targeting the five largest buyers of Russian crude, including China and India. If invoked, this could remove 3.5% of global crude oil supplies, exacerbating the already strained situation. President Trump may avoid invoking the Act before the Congressional elections in November to prevent a rise in gasoline prices, which have already reached $4.30 per gallon in the US, a level that could impact the Republican Party's chances.

Diplomatic efforts are at a crossroads, with Iran and the US failing to reach an agreement. The US rejected Iran's proposal to revert to a June agreement, setting the stage for further hostilities. Meanwhile, oil exports remain difficult to track due to ships switching off transponders, making it challenging to assess the true supply situation. Despite estimates suggesting a return to pre-war export levels, Brent crude remains 40% higher than its pre-war level, indicating ongoing shortages or increased shipping and insurance costs.

Petroleum products face an even sharper squeeze, with a significant increase in diesel prices in Europe and the US prompting the G7 to release 100 million barrels over the coming months. China has resumed crude oil imports, reversing an earlier decision to reduce imports. However, Iranian crude oil loadings have dropped to negligible amounts due to the American blockade of Iranian ports, raising the risk of Iranian retaliation. The US has refused to engage in combat operations against the Houthis, leaving Saudi Arabia to face the threat alone.

For India, the war has already had a substantial economic impact, with the price of the Indian crude oil basket rising from $70.86 per barrel before the conflict. A $1 increase in crude oil prices adds nearly ₹18,000 crore to India's annual oil import bill. LPG prices have also surged to above $800 per tonne, up from $460 per tonne before the war. The US has ordered three aircraft carriers to the region by the end of November, providing President Trump with an option if negotiations fail. The two sides must return to the negotiating table to find a political solution and prevent further escalation in oil prices.