Israel-Hamas War: How This Conflict May Impact Crude Oil Supply For India, Global Economy?

Israel-Hamas War: The tension in the Middle East continues to worsen with thousands of lives lost, and no signs of peace between Israel and Gaza anytime soon -- the last bit is a blurry scenario! An assault that began from Gaza's militant group Hamas on October 7th, killing thousands of Israelis, has led to a full-fledged war declaration from Israel.

16 days into the war, Israel's defence forces have vowed to step up their bombardment of the besieged Strip whose northern regions are at the brink of flattening. Both sides are suffering! And this is likely to play a huge role going forward, especially in the global economy including that of India.

As of now, media channels have reported that 4,651 Palestinians have lost their lives while 14,245 others have been wounded severely and undergoing medical treatment, an outcome of Israel's heavy airstrikes. However, the Jewish majority region has witnessed a death toll of over 1,400 civilians, an aftermath of Hamas's barbaric crimes on the Shabbat day.

In the latest development, the United States is increasing its military presence in the east of the Red Sea, as a warning to neighbours in the north of Israel, namely Lebanon and Syria. The American warships have shot down many drone attacks and missiles that have headed towards Israel. Meanwhile, new transport of aid trucks has entered Gaza through the Rafah border that is shared between the Strip and Eqypt, carrying food, healthcare-related supplies like essential life-saving medicines, surgical items, along with tents, sleeping bags, tarpaulins, sanitary utilities, and water purification tablets among others.

While the aid was allowed by Israel, the country has also issued a new warning to the citizens in Gaza to move to the South region from the North which also has the main Gaza city. Israel has also warned that those who stay put in the north of Gaza despite the warning will be seen as sympathizers of Hamas which is identified as a 'terrorist organization' by Israel and Western countries.

At the same time, US bases in regions of Lebanon, Iraq and Syria conflict with the local citizens as they are protesting against the American support of Israel. Many are expecting a ground invasion by Israel anytime soon in the days to come, while concerns of Hamas supporting leaders in Iran, Hezbollah and Syria to join the war are also looked upon.

The US has warned Iran and Hezbollah to not join the war between Israel and Hamas, while Prime Minister Benjamin Netanyahu has declared that his country is ready to face Iran and Hezbollah if the case arises. Both Israel and Hezbollah have clashed along the Lebanon border in the past few days, which is enough to grow concerns among other regions.

The region of the Middle East includes some of the major oil producers of OPEC+ such as Iraq, Iran, Kuwait, Saudi Arabia, and Bahrain among others. And the current Israel-Hamas war is likely to impact crude oil supply, which may hit many global countries including India too.

On October 20th, benchmarks Brent Crude and US WTI touched $93.8 per barrel and $89.85 per barrel respectively before correcting and ending at $92.51 per barrel and $88.30 per barrel respectively. This came after Hamas released two US nationalities who were among over 200 hostages that the group took on October 7th. However, broadly, crude oil prices have gained in the overall week with Brent crude and WTI surging by around 3% each. This would be their second consecutive weekly upside as heightened geo-political tensions raise supply concerns.

On the latest performance, Ravindra Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities said, there have been drone attacks against US bases in Iraq and Syria, while an American destroyer in the Red Sea intercepted cruise missiles fired toward Israel by Houthi rebels in Yemen raising concerns that the conflict might escalate to a US-Iran confrontation. Meanwhile, the US is aiming to buy as much as 6 million barrels of sour crude for delivery to the strategic petroleum reserve in December and January. We expect oil prices to remain buoyed amid higher risk premium."

In broader terms, let's find out how Israel and Hamas war can impact the world economy.

Global Economy:

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors said, the impact of the Israel-Hamas war on the world economy may take time to become apparent but it would worsen if it spread to the Middle East, notably Iran, a major oil producer and Hamas sponsor.

Explaining further, Bhargava said, the global economy would be affected by rising oil prices near $90. Further escalation of the conflict towards other Middle Eastern oil producers is concerning and requires careful monitoring, especially given the global economy's 'higher for longer' interest rate scenario. The oil supply is unlikely to be threatened unless the issue expands to other nations in the region and becomes a proxy conflict between the US and Iran.

He believes Any retaliation against Tehran might harm ships passing through the Strait of Hormuz, which Iran has threatened to close. This will increase worldwide shipping and insurance expenses and already rising oil prices.

"Brent had crossed the $90 mark but then retreated. Now we can use the $90 number to be the threshold beyond which there is trouble for the world economy," he added.

With surging crude oil prices, the global economy faces high inflation again. Bhargava added, "If oil prices stay high, the US, India, China, and other major nations that import oil may see substantial import inflation."

When oil prices rise, Bhargava highlighted that the cost of production for various industries and energy costs for businesses and households also surge, driving inflation higher. High energy prices and new inflationary trends could undermine the efforts of central banks to bring inflation under control. This can see interest rates at an elevated level for a prolonged period.

Indian Economy:

India continues to enjoy relative macroeconomic stability at this moment but is vulnerable to one key risk - supply disruption in crude oil prices because of escalation in the war, resulting in a spike in crude oil prices, Bhargava said.

However, he further said, that high crude oil prices hurt India impacting currency stability (making imports expensive), possibly worsening the government's fiscal deficit (the government is likely to absorb higher prices by cutting excise duty), widening the CAD further impacting currency adversely and affecting the profit margins of sectors such as aviation, paints, tyres and chemicals. All these implications could have a negative impact on economic growth in the short term, as high inflation and low profitability in various sectors would hit disposable incomes and discretionary spending.

The conflict is not affecting India's trade with Israel immediately. But he added, "Should the battle escalate, supply-side issues may arise. India's 1.8% merchandise exports to Israel are mostly petroleum products. Israel imports $5.5-6 billion in refined hydrocarbons from India. India's exports to Israel were $8.4 billion in FY23. India imports equipment, pearls, diamonds, and other precious and semi-precious stones from Israel. India imported $2.3 billion from Israel in 2023."

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