Crude oil poised for sharp surge as US–Israel strikes on Iran stoke supply fears

The latest coordinated military strikes by the United States and Israel on Iran, reportedly killing Tehran's Supreme Leader Ayatollah Ali Khamenei along with several of his family members and close political and defence advisers, have injected fresh geopolitical risk into already fragile global energy markets. With tensions escalating across the Persian Gulf and retaliatory threats from Tehran, oil prices are likely to react sharply when global markets open on Monday — not merely due to fundamentals, but because traders are repricing the risk of potential supply disruptions. The strikes followed the failure of the third round of talks in Geneva, Switzerland, on Thursday, which ended without a breakthrough on Iran's uranium enrichment programme and the complete cessation of its nuclear activities.

The US–Israel missile and drone offensive began early Saturday and was reportedly more devastating than last year's 12-day round of attacks. This time, US- and Israel-made precision missiles and drones targeted Iran's defence infrastructure and senior leadership installations, damaging key military assets and equipment. The strikes also reportedly killed a judge accused of continuing the execution of alleged protesters despite earlier warnings from US President Donald Trump calling for an end to such actions, along with other key decision-makers. Iran is now reportedly in the process of selecting a new Supreme Leader to carry forward Khamenei's legacy.

US President Donald Trump has warned Iran against retaliation, stating that more severe strikes could follow if Tehran responds militarily. Israel has similarly cautioned that further precision strikes would be launched if Iran continues attacks on US defence installations in the Middle East, amid limited direct military engagement between the two sides targeting Tel Aviv or Washington. Iran has faced Western sanctions for years, limiting its ability to stockpile advanced arms and ammunition to sustain a prolonged multi-front conflict.

Meanwhile, sections of the Israeli and US leadership have indicated a desire for a change in Iran's governing establishment and ideological direction. While some Iranian citizens have reportedly expressed support for the strikes, many others have condemned them, with protests erupting in Tehran and other major cities. Violent demonstrations were also reported in Pakistan outside the American consulate, resulting in casualties among protesters. Peaceful protests condemning the killing of Khamenei were witnessed in multiple Indian cities as well as in several other Muslim-majority countries.

Iran's retaliation
Iran retaliated with precision attacks on key infrastructure, defence installations, and civilian locations across nine countries in the Middle East, including the United Arab Emirates, Saudi Arabia, Syria, and Jordan, among others. Israel stated that it carried out a new wave of strikes "in the heart of Tehran," as Iran launched fresh attacks following the killing of Khamenei. Iran has already targeted US military bases, Israel, and other strategic locations across the region. The conflict has damaged air hubs, struck densely populated areas, and disrupted oil shipments.

While the countries targeted by Iran have not yet responded with retaliatory strikes, nations such as Saudi Arabia have warned of countermeasures if missile and drone attacks from Iran continue. Historically, Iran's conflicts with other Gulf players have largely been conducted through proxy groups such as Hezbollah and the Houthis, as well as through maritime incidents, cyber activities, or political pressure, rather than direct state-to-state warfare. These proxy groups have yet to openly join forces with the Iranian military in the current conflict against the United States and Israel.

Supply uncertainty
The US–Israel military campaign against Iran and the resulting geopolitical escalation have injected significant uncertainty into global crude oil markets. While direct supply disruptions have not yet fully materialised, the perception of heightened risk is enough to push oil prices higher, with markets bracing for continued volatility.

For India, with limited strategic reserve coverage and heavy import dependence, the spillover effects extend to higher import bills, rising inflation, currency pressures, and potential impacts on economic growth. In the short term, the Strategic Petroleum Reserve (SPR) and commercial inventories may cushion immediate supply gaps; however, the economic strain of persistently elevated oil prices would be substantial, requiring a coordinated mix of strategic, fiscal, and diplomatic responses.

Impacts
As an immediate impact, the airspace of several Middle Eastern countries has been closed and airports have been shut, with aviation companies such as Lufthansa declaring a complete halt to operations on routes across the Arab world until March 8, 2026. Reports indicate that around 5,000 aircraft have been grounded, disrupting regional connectivity and significantly affecting air traffic linking the East and the West. Meanwhile, the Iranian regime has reportedly declared the closure of the Strait of Hormuz, resulting in hundreds of oil tankers waiting offshore for transit clearance.

The Strait of Hormuz is the world's most critical oil transit chokepoint, linking the Persian Gulf with the Arabian Sea and global markets. Roughly one-fifth of the world's crude oil and a significant share of liquefied natural gas exports pass daily through this narrow waterway, with major producers such as Saudi Arabia, Iraq, the UAE, Kuwait, and Iran relying on it to ship supplies to Asia, Europe, and North America. Any closure or prolonged disruption would immediately remove millions of barrels per day from accessible global supply, triggering a sharp spike in oil prices, freight rates, and insurance costs.

Even a temporary blockage could send Brent crude surging due to panic buying and heightened risk premiums, while an extended shutdown would strain strategic reserves, disrupt refinery operations worldwide, and potentially push vulnerable economies toward inflationary or recessionary pressures. In essence, the Strait's uninterrupted functioning is central to global energy security and price stability.

At this stage, global supply has not collapsed; rather, a fear premium is driving price movements.

Experts suggest that even before any physical shortfall occurs, prices can rise purely on risk perception — often adding US$ 5–10 per barrel or more. This volatility is amplified by traders' reactions to geopolitical headlines and by higher insurance and freight costs for tankers navigating risk-prone waters. Should Iran or its proxies target shipping lanes or oil infrastructure in the Gulf or the Red Sea, these pressures could intensify further. Rising energy prices would add to global inflationary pressures and negatively affect the broader world economy.

Geopolitical risk and price volatility
Even before the conflict widened, Brent crude — the global benchmark — had climbed to multi-month highs near US$ 72–73 per barrel, driven by geopolitical anxiety and tight global spare capacity. Analysts now warn that any material disruption to the Strait of Hormuz — the world's most critical energy chokepoint — could lift prices substantially. Nearly 20 percent of global oil and gas flows transit this narrow waterway, making even limited interruptions costly. The potential for strikes had already pushed crude oil prices to a six-month high in the previous week.

Some models suggest that if shipping through Hormuz is impeded, Brent crude could surge past US$ 90–100 per barrel or even higher, particularly if Iran escalates its countermeasures or if infrastructure in other Middle Eastern producing nations comes under threat. OPEC+ — the Organization of the Petroleum Exporting Countries and its allies — is reportedly debating whether to significantly boost crude output to curb price spikes. However, Saudi Arabia and the UAE are among the few members with meaningful spare capacity, and any production increase would likely only partially offset the emerging supply risks.

Repercussion on India
India is one of the world's largest crude oil importers, meeting roughly 85 percent of its energy needs through overseas purchases. A significant portion of this — nearly 2.6 million barrels per day in recent months — transits via the Strait of Hormuz from suppliers such as Iraq, Saudi Arabia, Kuwait, and the UAE. Analysts warn that if transit through Hormuz is disrupted — even temporarily — around half of India's crude imports could be affected, exposing the economy to both supply risks and a sharp rise in the cost of imported energy.

India's Strategic Petroleum Reserve (SPR) — designed to cushion short-term disruptions — currently holds around 74 days' worth of oil stocks. While this provides a meaningful buffer, it is relatively limited compared with the larger reserves maintained by other major consuming nations and is primarily intended to bridge short-term interruptions rather than prolonged disruptions. Beyond the SPR, commercial inventories held by refiners offer additional cushioning. However, the principal vulnerability lies in price risk rather than immediate supply shortages, as alternative procurement strategies and rerouting — such as sourcing from different suppliers — could take weeks or longer to implement.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com