Risks of deepening crude oil crisis for lenders

The multidimensional risks of a crude oil glut should be viewed from both a price and a supply-disruption perspective. To reflect on the risks and ramifications of the crude oil crisis, a look at the track of 77 days (May 16) since the Israel-US attack on Iran on February 28 is kept in view, showing no permanent resolution yet in sight. 

The fragile ceasefire since April 8 is heightening anxiety in global financial markets, with occasional gyrations and shocks. Global markets are already battered by price hikes and supply chain disruptions, leading to the forced closure of many smaller units and economic activities that go unnoticed. When the resilience of stronger economic units and entities burns out, the impact could be even more daunting. 

The closure of the Strait of Hormuz and the resulting massive disruptions to global trade have a significant impact on freight and insurance costs, feeding into inflation in many economies. In this league, Iran is probably the only country less dependent on energy, global trade, and currency swings than the rest of the world. 

The inflation spike in major economies underscores the war’s impact. Compared with January inflation data, the April increase is alarming. US CPI rose 3.8% year-over-year in April 2026 — the highest since May 2023 — up sharply from 2.4% in January, before the war began. The monthly rate was 0.6%, while energy prices jumped 17.9% annually and gasoline surged 28.4%. 

UK inflation rose from 3% to 3.3%; Euro Zone from 1.7% to 3%; Japan from below 2% to 2.5%; India from 2.75% to 3.48%. What has been shown so far has been milder than what comes next as the reserves wane. 

The blockade of crude and merchandise, causing a rise in energy, transportation, and insurance costs, will feed into the prices and availability of daily groceries, and any panic hoarding, even in small amounts, could be alarming, a reality that decision-makers need to recognize and act swiftly to end the war. 

Domestic crude dynamics: India now consumes approximately 5.4 million barrels per day of crude oil, up from 4.7 million barrels per day in FY22, making it the world’s third-largest consumer after the United States and China. The per capita consumption of crude oil in India is 1.4 barrels per annum, compared to 22 barrels per annum in the US and 5 barrels per annum in China, with a global average of 4.5 barrels per annum. India’s per capita consumption is among the lowest in the world, and efforts are on to transition to alternative non-conventional energy sources. 

In this context, India’s crude oil import dependency stood at 89% in FY 2024-25 — meaning that domestic production accounted for close to 11%. India imports crude from approximately 40 countries, and about 70% of crude imports come through routes outside the Strait of Hormuz in normal times, but the remaining 30% transiting through Hormuz represents the most vulnerable link in the supply chain.

India was able to source Brent Crude from Russia since 2022, after the Russia-Ukraine war began at concessional rates, but when the crude prices shot up from $80 to $120 and stayed close to $100 post the US–Israel war with Iran, the crude import bill shot up, impacting the foreign exchange reserves. The rise in domestically produced Ethanol blending to 12% is planned to increase to 20% in the coming years, providing some relief from import dependency, but it has its own limitations. 

When rupee depreciates, as it has now breached the Rs. 95 per dollar mark, the import costs surge further, depleting forex reserves. The drain on forex resources is caused by higher crude prices, RBI interventions to prevent wild fluctuations in rupee vs. the dollar, and the flight of foreign investments, which works out to $20 billion during the four months of 2026. Foreign investors are pulling out of Indian equities amid global risks and shrinking risk appetite. 

During FY26, the crude oil import bill reached $175 billion, accounting for 22.6% of the total import bill of $775 billion, with the average crude price at $68 per barrel. It is easy to imagine the impact of crude import costs on the FY27 total import bill if the average crude oil price ranges between $ 80 and $ 90, though this is difficult to estimate at this point in time. 

With losses of state-owned oil companies accumulating to over Rs. 2 lakh crores since the West Asia Crisis erupted, it has become compelling to hike petrol and diesel pump prices by a moderate Rs. 3 per liter, may be partial as of now. But even this mild hike is expected to add 20 to 30 basis points to CPI inflation, both directly and indirectly. It will make the RBI’s task of monitoring CPI inflation at the midpoint of the 4 percent inflation glide path in FY27 daunting. 

Indirect impact:  Disruptions in crude oil cannot be viewed in isolation, as its components are used in many industrial products beyond pump supplies. Its supply and prices reverberate across many commodities, many times beyond comprehension.

Crude oil is a complex blend of hydrocarbons. Refineries and chemical plants separate and transform it into smaller chemical units called petrochemicals—mainly ethylene, propylene, and benzene. 

These units are then used to produce plastics, fertilizers, synthetic rubber, pharmaceuticals, cosmetics, clothing fibers, and various industrial materials. About 10–20% of total oil consumption is dedicated to petrochemical feedstocks instead of fuel. 

Although fuels are affected first during an oil shock, the impact eventually extends to the availability and prices of products like plastics, packaging, fertilizers, synthetic fibers, and medicines.

When the Strait of Hormuz is closed or passage becomes restricted, it affects more than just Asian refiners seeking crude oil for fuel. The Middle East, which usually exports naphtha, ammonia, urea, and helium through the strait, now faces challenges to these supplies.  

Going forward, if the West Asia crisis persists, there could be a price rise and even a supply crunch not only of petrol and diesel, but also of many other items of daily use whose interdependence on the byproducts of crude is not fully recognized.  

The most prominent hit is to farmers whose fertilizer and urea supply could be hit hard, raising the costs of farm products.  The World Bank’s fertilizer price index rose by more than 12% in Q1 2026 alone and is projected to increase by more than 30% for the full year 2026, driven by a 60% jump in urea prices. 

Risk meter for lenders: The currently embedded risk management framework may not fully capture the 360-degree risks that borrowers will face. Lenders will need to reform their risk assessment apparatus and reinvent risk management strategies to mitigate the complex risks the industry will face as the full impact of the West Asia crisis reflects in businesses. 

The risks that are apparent now are far less than the enormity of risks in the pipeline that are yet to manifest. Market intelligence and risk meters for banks and lenders need to be sharper and more sensitive to capture granular impact and to take proactive corrective measures to mitigate risks and navigate the current turmoil.  

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