Strait of Hormuz
The tension that has been going on between America and Iran for the last 3 months may come to an end soon. Iran has agreed to America’s peace proposal, which also involves opening the Strait of Hormuz. It is being speculated that a treaty may be signed between the two countries on Trump’s birthday on June 14. Ever since this war started, the only issue that has been in discussion is the Strait of Hormuz. Iran closed it and the entire world’s oil economy was shaken. Now it is expected to open soon. Let us tell you what effect the opening of Hormuz will have on the oil market and apart from this which sectors of India will it directly affect.
The reduction in tension in the Middle East and the opening of the Strait of Hormuz is considered a relief news for the global oil market. This narrow sea route, included in the world’s most important energy routes, connects the Persian Gulf to the Arabian Sea and is considered the lifeline of global oil supply. Whenever there is a threat of crisis on this route, there is a surge in oil prices. At the same time, when the route remains open normally, stability returns to the market and oil importing countries get relief. It also happened that amidst the news of opening of Hormuz, the prices of crude oil crashed. Till the time of writing the news, Crude Oil and Brent fell by more than 3 percent on Trade Economics.
Hormuz is important for global energy
The Strait of Hormuz is very important for global energy trade. According to the US Energy Information Administration (EIA), about 20.9 million barrels of oil passes through the Strait of Hormuz per day, which is about 20% of global petroleum consumption. At the same time, about 20% of the world’s LNG trade also travels through this route. One in five barrels of oil and one in five LNG cargoes in the world passes through the Strait of Hormuz. Therefore, any disruption in this narrow sea route can shake the global energy market and have a direct impact on the economies of big importing countries like India.
Strait of Hormuz
Hormuz plays an important role in transporting oil from major energy producing countries like Saudi Arabia, Iraq, United Arab Emirates, Kuwait and Qatar to the markets of Asia and Europe. This is the reason why any kind of military tension or maritime obstruction in this region directly impacts oil prices. The impact of the closure of Hormuz was seen on all these countries too, but if Hormuz opens now and supplies start flowing properly, then these countries will benefit. However, many market and oil experts believe that if the Strait of Hormuz opens now, it may take at least a year for the situation to be back to normal.
Important not only for oil, but also for LNG
Hormuz is not only a route for crude oil, but is also very important for global gas trade. About 20% of the world’s LNG (Liquefied Natural Gas) supply passes through this route. Qatar’s large gas exports in particular depend on Hormuz. If there is an obstruction in this route, price pressure may also increase in the global gas market.
Why is it so important for India?
India will also benefit from the opening of the Strait of Hormuz. India is the third largest oil importer in the world and buys about 85-88% of its crude oil requirement from abroad. About 35-40% of India’s total oil imports come from countries whose exports pass through the Strait of Hormuz. The supply disruption affected India. There was an increase in the prices of domestic LPG and commercial cylinders in the country and the government also increased the prices of petrol and diesel. With the opening of Hormuz, the prices of crude oil will fall, which will also reduce the pressure on oil marketing companies in the country.
What would be the benefit of keeping Hormuz open?
If Hormuz remains completely open and safe, then first of all the concerns regarding supply in the global market will reduce. Due to normal availability of oil, the risk premium in prices may reduce and the pressure on Brent crude may reduce. Apart from this, insurance and shipping costs for sea vessels can also be reduced. During stress, insurance companies charge higher premiums, which increases the final cost of oil. Under normal circumstances this additional burden is reduced. Its direct benefit for India will be visible in the form of relief in the import bill. Keeping oil prices under control will reduce the pressure on the government, will help in managing the current account deficit (CAD) and inflation will also be kept under control. Besides, the stability of the rupee may also get support.
Which sectors will get relief?
Airlines, logistics, chemical, paint and transport sectors will get the biggest benefit from stability in oil prices. The costs of these industries are directly linked to fuel and petrochemical products. By reducing costs, the margins of companies can improve and the pressure of inflation on consumers can be reduced.
What will be the impact on India?
The Strait of Hormuz is not just a sea route, but the most important center of global energy supply. One out of every five barrels of oil in the world passes through here. In such a situation, keeping it open and safe is very important for the global economy, oil market and big importing countries like India. If stability continues here, there will be less pressure on oil prices, India’s import bill will remain under control and the chances of getting relief from inflation will increase.
Also read- How much Iran used to earn from Hormuz, if the road opens then how will it collect toll now
