Crude oil prices rose nearly 1 per cent in early trade on Wednesday, extending the previous session’s sharp gains, after fresh US-Iran strikes raised concerns over supply disruptions from the Middle East.
Brent crude futures rose 87 cents, or 0.92 per cent, to USD 95.52 a barrel by 0008 GMT, while US West Texas Intermediate crude futures gained 80 cents, or 0.89 per cent, to USD 91.02. Both contracts had surged more than USD 4 on Tuesday.
The latest escalation has increased worries about the Strait of Hormuz, a key global oil shipping route, and could have significant implications for India, which imports a large part of its crude oil requirement.
Here is what the latest oil surge means for India, the rupee, inflation and stock markets.
Why has crude oil suddenly risen?
The immediate trigger is the fresh escalation between the United States and Iran.
The US said it carried out airstrikes against Iranian military targets, including air defence, communications and mine-laying capabilities. Iran subsequently retaliated by targeting US military bases in Jordan and Bahrain.
The exchange of attacks has raised fears that the conflict could spread further across the Middle East.
The biggest concern for oil markets is the Strait of Hormuz. The waterway is one of the world’s most important energy routes and carried about one-fifth of global oil consumption before the conflict.
Iran’s Islamic Revolutionary Guard Corps has said the US attacks could further restrict traffic through the strait.
Any prolonged disruption could therefore affect global crude supplies and push prices higher.
Why is the Strait of Hormuz so important?
The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Major oil producers in the Gulf region depend on the route to export crude to global markets.
For oil-importing countries such as India, any disruption to shipments can increase both the cost and uncertainty of crude supplies.
The latest attacks on tankers departing the Strait of Hormuz have already added to concerns about shipping and supply.
If the situation remains tense, traders could demand a higher risk premium on crude, pushing prices higher even before an actual large-scale supply shortage emerges.
Crude oil moves closer to the USD 100 mark
Crude oil has now moved sharply higher over the past few sessions. Market expert Anil Singhvi said crude was trading above USD 96 a barrel and had moved close to USD 97, raising concerns that it could approach the psychologically important USD 100 level.
He said the continued strength in crude is negative for the Indian market. Singhvi also highlighted the psychological impact of the move.
Crude had earlier moved to USD 90 but did not fall back to USD 88. It then reached USD 92 without returning to USD 90 and subsequently moved to USD 94 without falling back to USD 92.
According to him, if crude reaches USD 97, investors could increasingly start worrying about a move towards USD 100.
A sustained rise above USD 100 would be a bigger concern for oil-importing economies such as India.
Why is expensive oil bad for India?
India imports a large portion of its crude oil requirement. Therefore, when international crude prices rise, Indian refiners and the broader economy face higher input and import costs.
A sustained rise in crude can put pressure on India’s import bill and current account balance. It can also affect the rupee because higher oil prices increase the demand for dollars to pay for imports.
A weaker rupee can, in turn, make crude imports even more expensive in rupee terms. This creates a difficult situation for policymakers if oil prices remain elevated for a prolonged period.
What happens to inflation?
Higher crude prices can eventually feed into inflation. The most direct impact is through petrol, diesel and other petroleum products. Crude is also an important input for several industries.
Higher transportation and logistics costs can increase the cost of moving goods.
This can affect companies across sectors, particularly those with high fuel or transportation costs.
If crude remains close to USD 100 for an extended period, the inflation pressure could become more significant.
For India, this is particularly important because stable inflation provides greater room for monetary and economic policy support.
What could happen to the rupee?
The rupee could also come under pressure if crude prices remain high. India needs dollars to pay for imported crude. When the oil import bill rises, demand for dollars can increase.
This can put pressure on the rupee, particularly if foreign portfolio investors are also selling Indian equities because of global risk aversion.
A weaker rupee can increase the domestic cost of imported commodities and raw materials.
However, the actual impact will depend on how long crude oil prices remain elevated and how the Reserve Bank of India and other market participants respond.
How could Indian stock markets react?
The immediate market reaction is likely to remain cautious. International market expert Ajay Bagga said the latest escalation could keep global markets in a risk-off mode. “Oil prices have risen 4 per cent, and the situation has worsened somewhat,” Bagga said.
He added that the rise in oil prices would affect Indian markets and said the overall environment appeared to be a risk-off day for global equities.
Asian markets opened lower, while US futures were also trading in the red, he said. For Indian equities, the key trigger will be the direction of crude oil rather than just the military developments.
If oil prices stabilise, some of the pressure could ease. But a sustained move towards USD 100 or beyond could increase selling pressure.
Which Indian stocks could be affected?
Oil-sensitive sectors are likely to see a mixed impact. According to CLSA’s analysis, higher crude prices could be positive for upstream oil producers such as ONGC and Oil India.
Higher crude prices can improve the realisation and profitability outlook for companies involved in oil exploration and production.
However, the impact could be negative for downstream oil marketing companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation.
These companies can face pressure if crude prices rise sharply and their ability to pass on the higher input cost is limited.
Why does CLSA see further upside in oil?
CLSA said around 70 per cent of the more than 1 billion barrels of supply shortfall from countries dependent on the Strait of Hormuz between March and July 2026 was met through releases from strategic reserves held by China, the US and OECD countries. However, those reserves are not unlimited.
CLSA said limited upside in crude prices, a sharply backwardated futures curve and below-average net-long positioning suggest that the market is currently expecting supply conditions to become more comfortable. The brokerage differs from this view.
It sees a low likelihood of near-term relief in supplies. It expects China, South Korea and Japan could increase imports as they become less willing to draw further from their already depleted strategic reserves.This could push oil prices higher over the next two to three months, according to CLSA.
What should investors watch now?
For Indian investors, the most important indicators will be crude oil prices, developments around the Strait of Hormuz, the rupee and foreign fund flows.
Ajay Bagga said the latest developments were disappointing because markets had earlier hoped that the withdrawal of US diplomats from the Gulf region could signal an attempt by Washington to avoid further escalation. That expectation has now weakened.
Domestic liquidity could, however, provide some support to Indian equities. Both foreign institutional investors and domestic institutional investors bought equities in the cash market in the previous session.
The market will therefore have to balance geopolitical risks and higher crude prices against domestic liquidity and other local factors.
