Israel-Iran Conflict: Here's How Rising Crude Oil Prices Can Affect OMCs' Margins
Any disruption in the Strait of Hormuz can impact crude, LNG and product supplies, which will drive up prices and insurance costs, says Probal Sen.
The Indian oil marketing companies are likely to maintain their margins despite the rising crude oil prices amid the ongoing conflict between Iran and Israel, according to Probal Sen, senior research analyst at ICICI Securities.
If the ongoing conflict between Israel and Iran worsens, its impact on oil prices can be worse than the Russia-Ukraine crisis as there are significantly higher volumes at risk, Sen told NDTV Profit in a conversation on Thursday.
"There could be disruptions in LNG supplies and that is very relevant for India. It's difficult at this point to say whether this escalation will be more or less severe than previous conflicts," he said.
"But the impact on global markets could be greater than what we saw during the Russia-Ukraine conflict because the volumes involved are actually even larger than the Russian crude and gas output that was in play in April 2022," Sen added.
At present, Brent crude stands around $75 to $77, which is lower than the FY25 average and well below the four-year average of $81 per barrel, according to Sen.
"At this point, prices are still somewhat manageable from both a margin and pricing perspective. I think the fear really is that the Strait of Hormuz remains crucially monitorable over the next couple of weeks," he explained.
The Strait of Hormuz, a maritime corridor between Iran and Oman, is considered the world's most important gateway for oil transport. Hence, any disruption there can impact crude, LNG and product supplies, which will drive up prices and insurance costs, Sen explained.
On the potential impact on Indian OMCs, he said past conflicts did not lead to a full blockade of the Strait of Hormuz. Hence, if crude remains around $75 to $77, OMCs can still maintain good margins. "In Q4, I think they made an average of close to Rs 8 on a blended basis. In April and early May, they were making well over Rs 10 (per litre)," he said.
Sen explained that every dollar increase typically reduces the margin by about 53 paise per litre. "So, even with an $8 increase, if there is no pass-through, retail margins would still be around Rs 6, well above historical levels."
On Wednesday, Goldman Sachs said possible wider disruptions could push Brent crude above $90 per barrel.
