The Persian Gulf and the Strait of Hormuz is becoming the next big flash point in the Middle East situation. The problems started with the US imposing sanctions on Iran for not adhering to its side of the nuclear agreement. The sanctions were intended to break the economic backbone of Iran by cutting off their oil export routes. But this could pose a big risk for commodities.
The recent flashpoints
The problems in the Persian peninsula started a couple of weeks back when the UK seized an Iranian tanker off the coast of Gibraltar as it was apparently carrying oil to Syria. Since Iran was under sanctions, the tankers were seized. Iran retaliated by threatening British tankers near the Strait of Hormuz before backing off after warnings from British warships. The situation had apparently taken a turn for the worse in the last week when the US began by shooting down an Iranian drone. In the meanwhile, Iran has also seized two tankers under a British captain and held the crew captive. The Strait of Hormuz continues to be critical to the movement of oil and gas from the Middle East to the rest of Asia and Iran is surely trying to drive a hard bargain on this front. As of now both the US and Iran have avoided a full-fledged conflict. But the recent seizure of tankers by Iran has already been declared as an act of war by the US. But the bigger question is what this could mean for commodities?
Will the Strait be shut?
In the event of a declaration of war, it would largely depend on whether it is a limited confrontation or a full-fledged war. In a limited confrontation, the normal flow of traffic through the Strait of Hormuz is likely to continue. Of course, this would include a caveat that some of the flags might be in danger when they passed through the Strait. However, in the event of a full-fledged war, the Strait of Hormuz could be shut and Iran could also lay land mines which would make it hard for ships to pass by. That would be a worst case scenario.
Why India must worry
While most experts rule out a full-fledged war, even limited confrontation could be expensive. For example oil could rise to $90/bbl and this would be driven by futures buying before falling demand starts to impact oil prices. Also, the flow and price of LNG could be hit harder by the conflict as the Strait remains central to LNG transportation. Apart from Japan and South Korea, India also has a major reason to be worried. India currently imports nearly 85% of its daily oil needs and 70% of these imports come from the Middle East. Even a limited conflict could be extremely inflationary for India and also worsen its current account deficit. After all, 10% rise in oil prices widens CAD by 0.40% of GDP. For the Indian economy, that could be bad enough! ©