What is happening at the strategic chokepoint, the Strait of Hormuz
The Strait of Hormuz is the most critical chokepoint in global energy security, and its current situation is highly volatile. A naval blockade by both Iran and the United States has limited tanker movements, stranding thousands of vessels and disrupting nearly a fifth of global oil trade. Although Iran has conditionally reopened the strait under military supervision, shipping companies have been reluctant to resume operations due to threats of mines, drone attacks and sudden escalation. Maritime insurers withdrew war-risk coverage, driving premiums to unsustainable levels and further discouraging shipping. The disruption spanned global supply chains, affecting oil, LNG and fertilizer shipments, with South Asian economies particularly vulnerable. Diplomacy continues, but confidence in stability remains low.
Ceasefire Negotiations: Fragile and Inconclusive
Ceasefire talks between regional powers and international mediators have made tenuous progress. A temporary ceasefire has been announced, but violations continue, particularly in Lebanon and the Gulf. The absence of a sustainable peace framework means that oil markets remain subject to geopolitical uncertainty. Policymakers should prepare for prolonged periods of volatility, as the lack of reliable resolution increases supply risks and keeps markets volatile.
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The UAE’s exit from OPEC: collective action is weakening
The United Arab Emirates, one of the Middle East’s biggest oil producers, withdrew from OPEC last week, which is likely to reshape the supply landscape. By pursuing independent production targets, the UAE has undermined OPEC’s collective ability to manage output and stabilize prices. While this could eventually ease supply constraints if the UAE ramps up production, in the short term it adds to market uncertainty. For energy policy, this signals a weakening of OPEC’s unity, complicating efforts to coordinate global supply responses and further exposing markets to geopolitical shocks.
India and China: Strategic Alignment
India and China are the most affected by the US-Iran war as both rely heavily on imported oil and gas. India has resumed imports from Iran, diversified supplies through Russia and Venezuela, and expanded ethanol blending programs to reduce oil dependence. However, higher import bills have weakened the rupee against the dollar, creating external vulnerabilities. China has strengthened ties with Russia and Central Asia to secure pipeline flows, expand strategic reserves, and invest in domestic manufacturing and renewable energy. Both nations are leveraging diplomacy and diversification to protect their economies, but continued high price growth remains a significant risk to stability.
Global economic impact of rising prices
If Brent holds above $120, inflationary pressures will intensify worldwide, particularly in Europe and Asia. The IMF has warned of recession risks, as energy costs feed into food and manufacturing prices. The US The economy is showing resilience thanks to technological growth, but Europe faces renewed fears of stagflation. Emerging markets may see capital outflows as investors seek safe-haven assets, underscoring the need for a coordinated fiscal and monetary response to shore up economies against energy-driven inflation.
India’s weakness
As the world’s third largest oil importer, India faces serious challenges. If prices remain high, GDP growth may decline. If inflation levels breach the Reserve Bank of India’s tolerance band, it may lead to tighter monetary policy. The risk of fiscal deficit increases as subsidies on fuel and fertilizers expand and companies face margin pressures. Households are grappling with higher living costs, which exacerbates the policy trade-off.
Price Outlook and Ceasefire Prospects
The surge in Brent crude prices reflects a perfect storm of geopolitical conflict, supply disruptions and fractured OPEC unity. While India and China are adapting through diversification and diplomacy, the global economy is facing inflationary risks and potential recessionary pressures.
However, price forecasts remain divided. The International Energy Agency sees Brent potentially touching $130 a barrel if disruptions continue, while the U.S. The Energy Information Administration projects prices to fall below $90 by the end of 2026, contingent on a ceasefire. The prospects for a ceasefire remain uncertain, as regional powers use oil leverage in negotiations. Without sustainable peace, instability will dominate the outlook for the foreseeable future.
Haresh V, Head of Commodity Research at Geojit Investments
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