Sharply escalating tensions in West Asia following the US assassination of Iranian general Qasem Soleimani sent crude oil prices soaring past the $70 per barrel mark on Monday. The spike resulted in the Indian rupee taking a beating on the currency exchanges, the Sensex and Nifty falling the farthest in over six months and retail prices of petrol and diesel rising to their highest in over a year.
Already on an upward trend over the past few weeks, Brent crude prices have gone from just under $66 per barrel at the beginning of the year to breaching the $70 per barrel mark on Monday as fears of a supply disruption peaked. With India dependent on imports from the Gulf region for most of its oil requirements, increased tensions affected Indian currency and indices particularly hard.
The day saw the Sensex lose 788 points and the Nifty 233.6 points, the steepest fall since June last year, while the rupee lost as much as 30 paise in early trade and breaching the psychological Rs 72 per US dollar mark before ending the day down by 13 paise at Rs 71.93 to the dollar.
"The Indian market is reacting more negatively than other emerging markets due to the crude oil impact. Since our dependence on crude imports as a percentage of consumption is the highest, the impact on economy and markets is also higher," said Rusmik Oza, Senior VP (Head of Fundamental Research-PCG), Kotak Securities.
Rising crude oil rates pose many headaches for the Indian exchequer and economy. Significantly higher crude oil prices result in more stress on India's current account deficit by expanding its import bill. Rising crude oil prices also play a direct role in stoking price rise concerns by boosting fuel rates in the domestic market.
The spike in crude has already begun reflecting in petrol and diesel rates, India's oil marketing companies hiked petrol and diesel rates substantially across the country on Monday. In the national capital, petrol prices were increased by 15 paise a litre and diesel rates were increased by 17 paise a litre, with analysts noting that prices are likely to increase further over the next few days.
"Prices of petrol and diesel always react a little late to the rise in crude oil prices as state-run retailers fix fuel prices daily based on a complex algorithm of 15-day average international benchmark rates. Given the trend in oil prices, it is likely that fuel prices will increase in the next few days as well," Care Ratings said in a note.
However, as long as US-Iran tensions do not devolve into armed conflict and disrupt physical supply on the ground, global brokerages do not expect crude prices to remain elevated for long.
"It is not a given that any potential retaliation by Iran would target oil-producing assets,” Goldman analysts said, “The recent incident at the US embassy in Iraq occurred while there was no disruption to neighbouring oil fields…" The brokerage also noted that the September drone strikes on Saudi Arabia's crude processing facilities had shown that the market has significant supply flexibility.