Crude shocks loom on domestic market as US joins Iran-Israel conflict

Indian markets may open lower on Monday due to fears of crude oil disruption from the West Asia though domestic institutional investors may support valuations

Investors may have to brace for heightened volatility on Monday, following the US military’s direct involvement in the Iran-Israel conflict over the weekend.

 

Analysts expect benchmark indices Sensex and Nifty to correct by 1-1.5 per cent if crude oil prices spike and Asian markets react negatively to the escalating tensions in West Asia. However, sustained buying by domestic institutional investors (DIIs) could help cushion the blow. Last week, Indian equities gained over 1.5 per cent despite rising hostilities between Iran and Israel.

 

On early Sunday, US President Donald Trump announced targeted airstrikes on three of Iran’s major nuclear facilities — Fordo, Natanz, and Isfahan — using stealth bombers and bunker-buster bombs. He described the strikes as a “spectacular military success” and claimed Iran’s nuclear enrichment capabilities had been “obliterated”. Trump warned of further military action should Tehran retaliate. 

 

The strikes have raised fears of a broader and prolonged conflict. Brent crude has already surged 22.6 per cent in June to $76.6 per barrel. Analysts warn that prices could soar to $130 per barrel if Iran closes the Strait of Hormuz, a critical chokepoint for nearly 20 per cent of global oil supply. Such a disruption would exacerbate inflationary pressures, particularly for India, which imports 90 per cent of its crude, 40 per cent of which passes through Hormuz. Rising oil prices threaten India’s trade deficit and inflation outlook and may complicate the RBI’s growth-supportive policies. 

 

“Domestic equities are like a man having average temperature as one leg is in cold water and the other leg is in hot water. Domestic factors support the current valuation for long-term investors expecting moderate returns. Global factors from Trump policy to oil prices are boiling hot," said Nilesh Shah, managing director of Kotak Mahindra AMC. 

 

“Domestic equities are like a man having average temperature as one leg is in cold water and the other leg is in hot water. Domestic factors support the current valuation for long-term investors expecting moderate returns. Global factors from Trump policy to oil prices are boiling hot,” said Nilesh Shah, managing director of Kotak Mahindra Asset Management Company.

 

Shah said India has sufficient foreign exchange reserves to withstand higher oil prices, but advised traders to remain cautious and consider buying the dip.

 

Experts said investors could take cues from the oil markets. 

 

“It also depends on how much oil prices shoot up. Of course, some recovery can also occur due to DIIs buying. However, the magnitude of oil’s impact on the global economy and markets has come down over the years. The intensity of oil in global gross domestic product growth is decreasing due to the rise of the service sector and the growth of renewable energy. We have to see how this conflict pans out,” said G Chokkalingam, founder and head of research at Equinomics Research.

 

Historically, markets have recovered from West Asia-related shocks, but analysts expect short-term knee-jerk reactions and a flight to safe-haven assets like the US dollar, gold, and Japanese yen.

 

Ross Maxwell, global strategy lead at VT Markets, said, “With the US entering the Israel-Iran conflict, we are likely to see volatility as the markets reopen. Oil is likely to spike, which will cause further concerns on the impact this may have on inflation and the global economy as investors will look to cycle out into safe haven assets such as gold and Japanese yen.”