The West Asia conflict could cause an oil 'quantity shock', a rare event not seen in 50 years, potentially taking 15-20% of global supply offline and pushing crude prices and inflation higher for India and the world, an expert warns.
The escalating conflict in West Asia and disruption of flows through the Strait of Hormuz could have significant implications for India and the global economy, potentially pushing crude oil prices higher and adding to inflationary pressures, according to Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities.
'A unique quantity shock'
Speaking to ANI, Banerjee said the current situation is unusual because it involves a possible supply shock rather than just a price spike. "Actually, what we are seeing unfold in front of our eyes is something very unique, which has not happened in the last, I would say, at least 50 years, because it happened during the 1970s when we actually have an oil quantity shock," he said.
He noted that previous crises largely involved price shocks, whereas the present disruption involves a potential loss of a major share of global supply. "So all this while we have only seen oil price shocks, be it in 2008, 2011, 2022, but we never faced a situation where around 15 to 20 per cent of the global oil supply suddenly goes offline. And the region with the spare capacity, which is OPEC, is also offline because (of the closure of the) Strait of Hormuz."
Broader Impact on Global Supply Chains
Banerjee said the disruption could affect multiple commodities and global supply chains beyond crude oil. "In such situation, it's not just oil, it's also gas, it's also fertilisers, it's also chemicals, aluminium. So the whole supply chain of commodities, which has a ripple effect through the commodity chain into agriculture, etc."
"So all those things are getting impacted and we are seeing force majeures getting declared by various commodity producers, commodity processors and also commodity traders because they are not able to find enough quantity in the market at whatever price."
India's Position and Reserves
He said India has built a buffer through strategic reserves but warned that such a large supply disruption would affect all countries. "India has built a comfortable cushion as far as oil and gas is concerned. But the point is no country can ever plan for a complete disruption to 20 per cent of the global supplies. So every country is getting impacted. Nobody is spared."
Cruciality of Hormuz and Alternate Supplies
Banerjee stressed that restoring flows through the Strait of Hormuz in the coming weeks will be crucial. He added that India may receive additional supplies from Russia.
"But the good point is that we have we have already been approached by the Russian Federation who is willing to supply us with oil and gas. That will be beneficial. Yes, it will come at a price because the oil prices have risen, but at least the quantity will be available."
However, he warned that unless shipping through the strategic waterway resumes soon, oil prices could rise sharply.
Inflationary Concerns for India
On inflation, Banerjee said sustained high crude prices could push up consumer prices in India. "The CPI could rise by anywhere between 80 basis points and the WPI could actually expand more. But yes, it will be inflationary because it will start to, and it's kind of a consumption tax on the consumer because the consumer is the one who gets hit hard."
However, he said India's current inflation levels provide some cushion. (ANI)
(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed.)