K Raveendran
Oil markets are beginning to treat the disruption in the Strait of Hormuz less as a temporary geopolitical shock and more as a structural constraint on global energy supply.
That shift matters particularly for India, where the immediate consequences of higher crude prices intersect with a weaker rupee, more expensive shipping, narrowing refinery margins and an economy that remains overwhelmingly dependent on imported petroleum.
Brent crude has climbed back above $91 a barrel, reversing much of the decline that followed brief optimism earlier in August that negotiations could produce a durable settlement between Washington and Tehran. The market had temporarily entertained the prospect that diplomatic progress, coupled with a partial return of tanker traffic through Hormuz, would restore substantial volumes of Gulf crude. Those assumptions are now being steadily unwound.
A June memorandum intended to create a pathway towards a permanent settlement has effectively run out of political space. The 60-day period envisaged for a broader agreement expired without resolving the central disputes over sanctions, Iran’s nuclear programme, the US naval blockade and, most critically for oil markets, control and navigation through Hormuz. Washington has ruled out simply extending the arrangement, while Tehran insists the waterway will not return to normal operations unless its conditions are met.
Iran’s warning that it is prepared to move towards a “fully offensive” military posture has therefore altered the risk calculation. Tehran has indicated that it could take military action if diplomacy fails and the blockade continues. At the same time, President Donald Trump has sharpened his rhetoric towards Oman, threatening military action if Muscat obstructs Washington’s objectives as Oman and Iran discuss arrangements governing shipping through the strait.
The dispute is no longer merely about whether Hormuz is technically open or closed. The economically significant question is how much oil can move through it safely, predictably and at commercially acceptable insurance rates.
Before the war that began with US and Israeli strikes on Iran on February 28, roughly 18 million barrels of oil a day moved through the strait. Current movements are only a fraction of that level. Shipping data have shown exceptionally thin traffic on several days, including periods when virtually no commodity vessels passed through the waterway. Tanker attacks, naval restrictions and uncertainty over Iranian authorisation have turned each passage into a security calculation.
This prolonged impairment is why crude prices can rise even without a dramatic new military escalation. The market is increasingly pricing the duration of lost or restricted supply rather than merely reacting to missiles, strikes or political statements.
That distinction is crucial for India. India imports more than 90 per cent of the crude oil it consumes, making the economy unusually exposed to sustained increases in international prices. The disruption has already altered the geography of Indian sourcing. Russian crude accounted for more than half of India’s oil imports in July, reaching about 2.47 million barrels a day, as refiners compensated for lower Middle Eastern availability. The Middle East’s share of Indian imports has fallen substantially, while purchases from Latin America and other distant suppliers have increased.
Diversification has prevented a physical supply crisis, but it has not insulated India from the price crisis.
Russian barrels once offered Indian refiners sizeable discounts to global benchmarks. Those discounts have eroded as demand for alternative crude has intensified. Gulf grades have attracted higher premiums because fewer barrels are freely available. West African crude is also becoming more expensive, while transporting oil from the Atlantic basin or Latin America increases voyage distances, tanker demand and freight costs.
Indian refiners therefore face an increasingly uncomfortable combination: higher benchmark crude prices, smaller discounts, elevated freight rates and stronger premiums for immediately available physical barrels. The pressure extends beyond refinery balance sheets. Brent approaching $92 comes at a time when the rupee is already trading around record weak levels near 96 to the dollar. Oil imports are settled largely in dollars, so depreciation magnifies every increase in the international crude price. A barrel costing $90 is considerably more expensive to India when the rupee is near 96 than when the currency was trading in the low 80s.
That creates a potentially self-reinforcing external vulnerability. Higher crude raises India’s import bill and increases demand for dollars from oil companies. Greater dollar demand can weaken the rupee, which then raises the domestic cost of oil still further. Central bank intervention can smooth volatility, but it cannot permanently remove the underlying terms-of-trade shock if crude remains elevated.
The inflationary effects may initially appear muted because Indian retail petrol and diesel prices do not move mechanically with every fluctuation in global crude. State-controlled refiners and taxation structures can absorb or postpone part of the adjustment. But prolonged high prices eventually surface elsewhere through aviation fuel, petrochemicals, transport, manufacturing, fertilisers and freight.
Diesel is especially important because road transport remains central to Indian distribution networks. Higher logistics costs migrate into food prices and manufactured goods. Airlines face more expensive jet fuel. Chemical and plastics producers pay more for petroleum-derived feedstocks. Government finances can also come under pressure if policymakers decide that consumers should be protected from the full increase.
India nevertheless enters this phase with more options than it possessed during earlier Middle East oil shocks. Its refineries are technically sophisticated and can process a broad range of crude grades. Russian sourcing has provided a large alternative supply channel. Strategic petroleum reserves offer a limited emergency cushion, while refiners can draw barrels from the United States, Africa and Latin America.
The deeper danger is that Hormuz becomes a semi-permanently impaired artery rather than a temporarily interrupted one. Iraq is exploring ways to move more crude through alternative channels. Gulf producers possess some pipeline capacity that bypasses the strait. Shipping companies are examining longer routes and alternative logistics. Yet these mechanisms cannot quickly replace the enormous volumes that historically moved through Hormuz.
For India, that means the decisive variable is no longer simply whether peace negotiations resume. It is whether negotiations restore a credible, continuously functioning commercial shipping regime. Markets have already demonstrated how quickly they respond to perceived diplomatic progress. Brent fell towards $79 earlier this month when expectations strengthened that the conflict could be contained and the strait reopened. Its rebound towards $92 shows how rapidly that optimism has evaporated.
That swing of more than $10 a barrel also illustrates the extraordinary geopolitical premium now embedded in crude. India consequently faces two oil markets at once. One is the conventional global market shaped by demand, inventories, OPEC production and economic growth. The other is an increasingly fragmented security market in which the location of a tanker, its flag, its insurer, its route and the political alignment of its cargo can determine whether oil is physically deliverable.
