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Mint
8 hours ago
- Business
- Mint
US strike on Iran raises oil shock, capital flow risks for India's economy
New Delhi: The flare-up in West Asia following US missile strikes on Iran's nuclear facilities has heightened geopolitical tensions and intensified external risks to India's economy, even as many analysts say the escalation may prove short-lived. At stake for India is the potential fallout from surging oil prices, a widening current account deficit, higher energy and shipping costs fuelling domestic inflation, investor risk aversion, capital outflows, and broader risks to economic growth. 'The bigger impact will be on sentiment. However, oil intensity has been going down structurally. For India too, the share of oil imports in total imports has come down from 21% in 2018 to 16.5% in 2025," said Sachchidanand Shukla, group chief economist at Larsen & Toubro. Read this | Mint Primer: What if the US joins Israel's war with Iran? Shukla added that India can absorb oil prices up to $85 a barrel without triggering large macro imbalances. 'There is no need to panic and one needs to keep an eye on how the situation evolves," he said. In a televised address on Sunday (India time), US President Donald Trump confirmed the direct American assault on Iran's nuclear programme, ending days of speculation about Washington's entry into the Israel-Iran conflict. He warned that further strikes could follow. 'Remember, there are many targets left. Tonight was the most difficult of them all by far, and perhaps the most lethal. But if peace doesn't come quickly we will go to those other targets with precision, speed and skill," Trump said. Oil price spike the immediate risk A sustained rise in oil prices remains the most visible risk for India, which relies on imports for nearly 85% of its crude oil needs. Higher global prices can widen India's current account deficit, fuel domestic inflation, trigger risk aversion among investors, and slow down growth. 'Every sustained 10% rise in oil price versus the baseline can lower India's GDP by 15 basis points (bps) and raise inflation measured by Consumer Price Index (CPI) by 30bps. On the other hand, it can reduce global GDP by 15 bps and raise CPI by 40 bps which can impede the rate cut trajectory," explained Shukla. While crude prices have already risen from $64–65 per barrel to $74–75 since the Israel-Iran conflict erupted on 13 June, some offsetting factors remain in play. Read this | US attack on Iranian nuclear sites roils oil market, India braces for possible price surge Experts noted that oil supply from the Organization of the Petroleum Exporting Countries Plus (Opec+) is improving as members unwind voluntary production cuts. Crude output from Opec+ rose by 180,000 barrels per day in May compared to April, according to the cartel's latest monthly oil market report. This production rebound, experts said, could help cap sharp price spikes, provided the conflict does not escalate further. 'The current flare-up may be short-lived and could even mark a turning point in the West Asia crisis towards its early closure, given the substantial disparity in conventional military capabilities, though the complex regional dynamics suggest multiple pathways for conflict evolution," said Rishi Shah, Partner and Economic Advisory Services Leader, Grant Thornton Bharat. 'As things stand today, there may be regional disturbances but these appear unlikely to translate into a major negative shock for India's economy," said Shah. On the trade front, while treaty negotiations continue, commercial flows seem to be adapting and progressing despite the tensions, he added. "Therefore, based on current developments and assuming the conflict remains contained, we expect the net external impact on India's growth trajectory to be relatively muted in the near term — though this assessment remains contingent on the conflict not escalating significantly or disrupting critical energy supply routes," said Shah. Prolonged conflict could hit growth Economists warn that a prolonged conflict could have deeper consequences. 'For oil-importing countries like India, this means slightly higher inflation and increased fiscal costs. While we have some buffer, with inflation currently below 4%, expectations have suddenly firmed up," said NR Bhanumurthy, director of the Madras School of Economics. Bhanumurthy cautioned that the current account deficit could widen not just due to the oil import bill, but also from potential pressure on remittances and capital flows. 'CAD will be a key concern going forward," he said, adding that fiscal support may be needed to absorb part of the oil price shock. 'A sustained flare-up in the conflict poses upside risks for estimates of crude oil prices, and India's net oil imports and the current account deficit. A $10/bbl increase in the average price of crude oil for the fiscal will typically push up net oil imports by ~$13-14 billion during the year, enlarging the CAD (current account deficit) by 0.3% of GDP," rating agency Icra Ltd had noted in an earlier report. Oil marketing companies and the government can absorb some of the costs in the short term, Bhanumurthy said. 'There will be fiscal implications, but we do have some fiscal space as we have exceeded fiscal targets in the last two years," he added. A sharp oil price rise could also weigh on foreign inflows and hurt domestic investment sentiment, he warned. A similar note of caution was sounded by Madan Sabnavis, chief economist at Bank of Baroda, who said that if crude prices stay above $80 for long, the trade deficit will widen and the rupee will come under pressure. "Wholesale inflation will rise accordingly, but the impact on retail inflation will depend on how the government manages fuel prices," he said, adding that excise cuts, if implemented to shield consumers, would widen the fiscal deficit — 'one that can be absorbed." India's current account deficit edged up to $11.5 billion, or 1.1% of GDP, in Q3 FY25 compared to $10.4 billion a year earlier. Retail inflation eased to 2.82% in May, while wholesale price inflation fell to a 14-month low of 0.39%. Icra Ratings on Friday warned that oil is expected to average between $70 and $80 per barrel in FY26, and any sustained rise beyond current levels could weigh on India's growth outlook. Shipping watches Hormuz chokepoint The Strait of Hormuz remains a key chokepoint for global energy and container trade, with Indian shipping companies monitoring the situation closely. 'But operations and movement of ships as of now has remained unaffected in the region. We have not yet received any alerts from either UK Maritime Trade Operations that patrols the area or the Indian Directorate General of Shipping," said Anil Devli, CEO, Indian National Shipowners' Association. Even before the latest flare-up, some ships had begun avoiding the strait, pushing up freight rates and crew costs amid rising security risks. Read this | Mint Explainer | Strait of Hormuz: Will Iran shut the vital oil artery of the world? Any blockade could spike global energy prices, disrupt supply chains, and hit container trade across the Persian Gulf, South Asia, and East Africa. India is also watching its strategic asset in the region — Chabahar Port in Iran — closely. 'Operations at the port, located near Iran's southeastern border with Pakistan, remain unaffected and normal," an India Ports Global Ltd official said. Meanwhile, Adani Group's Haifa Port in Israel remains fully functional despite the ongoing conflict. 'Earlier strikes caused minor shrapnel damage nearby, but operations were unaffected," another official said. Haifa handles over 30% of Israel's imports and contributes about 5% to Adani Ports' revenue, though it accounts for less than 2% of cargo volumes. Rice exporters brace for fallouts Beyond oil, India's basmati rice exporters are facing uncertainty as Iran, a key buyer, may scale back purchases if tensions persist. Iran typically imports around 1 million tonnes of basmati rice annually from India, accounting for roughly a fifth of India's total basmati exports by volume. Several shipments are currently lying at Indian ports, with exporters hesitant to dispatch consignments amid growing uncertainty. "We are in a catch-22 situation. Amid escalation of tension, many of the exporters, whose shipments are lying at port have kept shipments on hold. If the current situation persists, exporters would be on the receiving end," said Satish Goel, President, All India Rice Exporters Association (AIREA). India's rice exports to Iran rose to $757.3 million in FY25 from $689.8 million a year earlier, accounting for three-fourths of India's total farm exports to the country. Also read | Javier Blas: An Israel-Iran war may not rattle the oil market The timing makes the situation especially sensitive — mid-June to mid-July is peak season for exports, just ahead of Iran's domestic harvest. 'This is a peak season, as in the middle of July Iran might temporarily ban shipments to protect their domestic farmers and ensure fair prices for their harvest," Goel added. 'This is a common practice, particularly during the harvest season, and is aimed at supporting local agriculture by reducing competition from foreign imports. The ban is usually lifted once the domestic harvest is sold." Vijay C Roy and Dhirendra Kumar contributed to this story
Business Times
09-06-2025
- Business
- Business Times
Oil prices hold gains ahead of US-China trade talks
[BEIJING] Oil prices held on to last week's gains early on Monday (Jun 9) as investors waited for US-China trade talks to be held in London later in the day. Brent crude futures were flat at US$66.47 a barrel at 0008 GMT. US West Texas Intermediate crude was trading up one cent at US$64.59. The prospect of a US-China trade deal supported prices as three of Donald Trump's top aides were set to meet with counterparts in London on Monday for the first meeting of the US-China economic and trade consultation mechanism. The announcement on Saturday followed a rare Thursday call between the two countries' top leaders, with both under pressure to dial down tensions as China's export controls on rare earths disrupt global supply chains. Oil prices posted their first weekly gain in three weeks on the news. A US jobs report showing unemployment held steady in May appeared to increase the odds of a Federal Reserve interest rate cut, further supporting last week's gains. Inflation data from China on Monday morning will give a reading of domestic demand in the world's largest crude importer. The economic data and the prospect of a trade deal that could support economic growth and increase demand for oil outweighed worries about increased Organization of the Petroleum Exporting Countries and its allies (Opec+) supply after the group announced another big output hike for July on May 31. HSBC expects Opec+ to accelerate supply hikes in August and September, which are likely to raise downside risks to the bank's US$65 per barrel Brent forecast from the fourth quarter of 2025, according to a research note on Friday. Capital Economics researchers said they believe this 'new faster pace of (Opec+) production rises is here to stay'. REUTERS
The Star
02-06-2025
- Business
- The Star
Oil output increase a potential bane
PETALING JAYA: Corporate Malaysia's fiscal position may come under pressure if the Organisation of the Petroleum Exporting Countries and its allies (Opec+) decide to further open the taps to boost oil output. Although Opec+ has agreed for now to keep its output policy unchanged, analysts opined that another production increase of 411,000 barrels per day in July is likely, matching the additional output in May and June. If the increase in oil output further gains momentum this year, it could put a strain on Malaysia's oil and gas (O&G) export earnings as the country is a net exporter of O&G, which could in turn impact its fiscal position and fiscal consolidation initiatives. The lower oil prices coupled with US tariffs and global recessionary risks are seen as hurdles in Malaysia's fiscal consolidation landscape. The government's oil price assumption for Budget 2025, announced last October, was set at US$75 to US$80 per barrel. As at press time, the international benchmark Brent crude was down by 0.35% to US$61.88 per barrel. Fiscal consolidation refers to government policies aimed at reducing deficits and debt accumulation. It involves measures to balance government revenue with expenditure, minimising deficits, controlling public debt, and promoting sustainable economic growth. Economist Anthony Dass told StarBiz that an increase in oil supply by Opec+ can add downward pressure on global crude oil prices. He said Malaysia, as a net exporter, would experience a direct impact from a loss of revenue. 'While the exact scale of the Opec+ increase is still under discussion, potentially around 411,000 barrels per day in July, with more unwinding of cuts by November, any significant addition to supply, especially if it outstrips demand growth, will negatively impact Malaysia's O&G export earnings. 'Looking at the petroleum-related revenue, for every US$10 per barrel drop in oil prices, it is estimated to reduce federal revenue by RM2bil to RM3bil. 'Should global recession drag Brent crude down to US$65 to US$70 per barrel versus (the) US$80 to US$85 baseline, there would be a drop in petroleum-related revenue,' said Dass, who is the senior economic adviser at KSI Strategic Institute for Asia Pacific and a member of the SME Association of Malaysia's National Council. The government aims to reduce its fiscal deficit from 5% of gross domestic product (GDP) in 2023 to 4.3% in 2024 and 3.8% in 2025. Dass is projecting Brent crude to hover at US$60 to US$65 per barrel this year. HSBC Asean economist Yun Liu said the current oil price is lower than the government's oil price assumption of US$75 to US$80 per barrel as announced in Budget 2025 last October. She said this may raise questions on energy-related revenue. 'But there are still a lot of moving parts of the fiscal consolidation plan. For example, we are still waiting for clarity on the sales and service tax (SST) expansion plan. 'It has reportedly been delayed for a month, so eyes are on any concrete plans to implement it. The other elephant in the room is the RON95 subsidy rationalisation. 'When and how it will be implemented will impact this year's fiscal plan,' Liu said. HSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham said he expects the oil price to be on a downward trajectory, with a forecast average of US$68.50 a barrel in 2025 and US$65 a barrel in 2026. That said, he said he sees the upcoming Opec+ meetings as a downside risk to these forecasts, with a high chance that another accelerated supply hike will be announced for July. 'A key driving force for these decisions is expected to be lack of compliance with current quotas by some of the smaller Opec+ producing countries. 'The Opec+ members have also been encouraged by recent announced cuts to capital expenditure by US shale producers, and are expected to continue to aim to gain market share by putting downward pressure on prices. 'There are limited upside risks to the demand for oil, with the key challenge being the global economic slowdown that is underway due to the trade policy shock. 'The upside risks are mostly related to possible supply shocks. These include potential disruption to supply from Venezuela and Libya, and risks of a rebound in supply from Iran, given the risk that an Iran-US nuclear deal does not arrive,' Bloxham noted. Juwai IQI global chief economist Shan Saeed said with Opec+ increasing output, global oil prices might face downward pressure in the short run and recover sooner than expected. He said Malaysia relies significantly on O&G earnings for its fiscal plans and can move smartly to generate revenues from other sources. Increasing the GDP size is a proven strategy to enhance the revenue base and consolidate the fiscal position to bolster the balance sheet of the government, he said. 'We expect Brent crude oil prices to move into two phases in the short and long run. In the short run, we expect the price to be around US$64 to US$67 per barrel. 'However, in the long run it is expected to trade at US$77 to US$83 a barrel based on a few factors. 'They include geopolitical risks, US dollar debasement, supply disruption from shale gas myth, and Opec+ production cuts,' Shan noted. US dollar debasement means the depreciation of the dollar due to the Federal Reserve (Fed) cutting interest rates. Shan anticipates the Fed will start cutting rates from July of this year onwards. He said the greenback has already depreciated 8% year-to-date, and foresees it to further depreciate upon the Fed cutting rates. Malaysia, according to Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, has been recording trade deficits in crude oil for the past three years. Last year, he said the trade deficits stood at RM37.1bil on the back of total exports and imports of RM26.1bil and RM63.2bil respectively. 'On that note, the contribution from O&G-related revenue to the government is going to be increasingly challenging. Not to mention that Petroliam Nasional Bhd may also need to allocate more capital expenditure for developing the renewable energy space and its overseas investments. 'In a nutshell, the government's revenue stream is expected to be more challenging, leading to more discussion to have other revenue streams to ensure the sustainability of the government finances,' he said, adding that he is projecting on the average for Brent crude to be at US$67 to US$68 per barrel for 2025. Mohd Afzanizam said on the whole the government has done well in managing its fiscal position. The first quarter of financial year 2025 (1Q25) fiscal deficits have been narrowed to 4.5% of GDP from 5.7% in the same period last year, he said. The upward revision in the service tax from 6% to 8% on March 1, 2024, has led to a 30.3% growth in SST collection in 1Q25 and the diesel subsidies rationalisation on June 10, 2024, has resulted in the decline of subsidies and social assistance expenditure from RM16bil in 1Q24 to RM12.9bil in 1Q25, he said. 'I suppose the fiscal consolidation momentum needs to be maintained and the communication will always need to be improved in general in order to get the total buy-in from the masses. 'It's also about the mechanism where it should be easily implemented where the general public can see the positive outcome almost immediately,' he said. OCBC Asean economist Jonathan Ng said the bank has revised its 2025 oil price forecasts downward, with West Texas Intermediate and Brent crude projected to average US$63 per barrel and US$67 per barrel respectively – about US$13 per barrel lower than the average oil prices in 2024. He said the reasons for the downward revision are predicated on slowing global economic growth amid uncertainties in global trade policies and higher-than-expected oil supplies from Opec+ countries. As to the positive growth drivers for the oil market this year in the current environment, Ng said an escalation in geopolitical tensions in Eastern Europe (for example, the Russia-Ukraine war) and the Middle East could lead to the implementation of further sanctions on the Russian and Iranian energy sectors. As a result, he said the supply disruptions are likely to support higher oil prices in the short-term, given the reconfiguration of trade flows. To strengthen the government's fiscal position in the short term Dass said, among others, there is a need to accelerate targeted cash aid for vulnerable groups and micro, small, and medium enterprises, fast-track high-multiplier development projects (especially in digital, green, and transport), and improve targeting of fuel subsidies to reduce fiscal leakage. Over the medium term, he said the government needs to continue fiscal base broadening: e-invoicing and subsidy rationalisation, maintain fiscal discipline to avoid rating downgrades (currently A–/A3 with stable outlook), and reaffirm fiscal consolidation roadmap and medium-term fiscal framework. To boost Malaysia's revenue and have a better grip on its fiscal consolidation, HSBC's Liu said the country should consider raising the tax coffers. 'Its tax receipts amounted to around 12% of GDP, lower than those of peers, so there's still the potential to raise the tax coffers. 'In the absence of a reintroduction of the goods and services tax, the tax tweaks and measures are necessary to boost fiscal coffers,' she said.
Business Times
02-06-2025
- Business
- Business Times
Oil advances as Opec+ supply boost vies with geopolitical risk
[SINGAPORE] Oil gained as a third straight production increase by the Organization of the Petroleum Exporting Countries and its allies (Opec+) vied with heightened geopolitical risk in Ukraine and Iran. Brent crude for August rose as much as 2.1 per cent to US$64.09 a barrel, after losing 2.2 per cent last week, while West Texas Intermediate was below US$62. The Opec+ agreed on Saturday to add 411,000 barrels a day of supply in July, according to a statement. The decision defied reports late last week that the group was considering accelerating the return of shuttered-in production by an even larger amount, which had damped prices on Friday (May 30). The quota boost matched those scheduled for May and June, and was in line with expectations in a Bloomberg survey of 32 traders and analysts. Escalating geopolitical concerns helped support prices. Ukraine staged a dramatic series of strikes across Russia, deploying drones hidden in trucks deep inside the country to hit strategic airfields as far away as eastern Siberia. Meanwhile, Moscow launched one of its longest drone and missile attacks against Kyiv, escalating tensions ahead of crucial peace talks this week. Iran manufactured a record volume of uranium enriched just below the levels needed for nuclear weapons, The International Atomic Energy Agency said. The Islamic Republic criticised the report, which complicates efforts to negotiate a peaceful resolution to international concerns over the Islamic Republic's atomic ambitions. Crude remains almost 15 per cent lower this year, pressured by an ongoing trade war between the US and China, as well as the abandoning by Opec+ of their former strategy of defending higher prices by curbing output. Opec+ officials said the quota boost reflected Saudi Arabia's desire to punish over-producing members such as Kazakhstan and Iraq. Some members – including Russia, Algeria and Oman – had wanted a pause in the increases, delegates said. The group next meets on Jul 6 to discuss output levels for August. BLOOMBERG
Business Times
04-05-2025
- Business
- Business Times
Saudis warn of more supply unless Opec+ cheats fall in line
[CAIRO] The Organization of the Petroleum Exporting Countries and its allies (Opec+) leader Saudi Arabia warned the group's overproducing members it could amplify a historic shift in policy and deliver further production increases unless they fall in line, delegates said. Riyadh steered the Organization of the Petroleum Exporting Countries on Saturday (May 3) to agree on a surge of 411,000 barrels a day in June, the second month in a row, in a bid to punish quota cheats such as Kazakhstan and Iraq. The kingdom is weighing returning the remainder of the group's halted 2.2 million barrels in similar increments unless the countries fall in line, according to the delegates, who asked not to be identified as the talks are private. The Saudi threat was reported earlier by Reuters. The threat suggests the kingdom is prepared to go even further in its sharp break with years of policy aimed at supporting prices as it tries to instil better discipline within the cartel. Coinciding with US President Donald Trump's trade war, the supply hikes are taking a brutal toll on oil prices, which have sunk to a four-year low near US$60 a barrel in London. Opec+ had originally planned to revive 2.2 million barrels a day of halted production in modest monthly slivers till to late 2026. Instead, it has approved the return of almost half that amount in just a few months, and now appears to be considering restarting the remainder at an equally brisk clip. BLOOMBERG
