Geopolitical tensions between India and Pakistan can introduce uncertainty into the global energy market, potentially causing oil prices to surge if the conflict remains localized. Several factors contribute to this potential surge, including concerns about regional instability and possible disruptions to supply chains.
The conflict's impact on oil prices stems from a few key areas. Firstly, any military conflict between the two nations could unsettle global oil markets. A rise in crude prices would directly impact transportation and manufacturing costs, which would then translate into higher prices for consumers. Secondly, geopolitical tensions often lead to capital outflows, which weakens the Indian Rupee. With India relying on imports for 83% of its oil needs, a weaker Rupee would raise the cost of crude oil imports.
Market analysts have observed a modest increase in crude oil and natural gas prices, which they attribute to concerns over regional instability. International crude oil prices climbed by approximately one percent recently, with Brent crude trading at $62.52 per barrel and West Texas Intermediate (WTI) at $59.54 per barrel. Simultaneously, natural gas prices surged by nearly 2 percent, reaching $3.55 per MMBTU in global markets. These increases are largely sentiment-driven, as geopolitical uncertainty introduces new risk premiums.
Experts suggest that the focused and non-escalatory nature of any military operations can reassure the market. However, there could be some reaction from Pakistan. It is worth noting Pakistan's limited economic capacity to sustain a prolonged conflict.
Even if direct trade between India and Pakistan is minimal, border tensions can still disrupt regional supply chains, especially in border states, which may cause localized price spikes for certain goods. Furthermore, increased defense spending during conflict can divert government resources from subsidies or social programs, potentially leading to higher costs for essential goods and services.
However, it's important to consider factors that could mitigate a significant oil price surge. For example, OPEC+ has announced an increase in output, signaling confidence in demand recovery and a shift in market dynamics. Stable global oil supply and sufficient inventories could also prevent price disruption, despite regional geopolitical tensions.
In early May 2025, oil prices experienced mixed movements. Crude oil for October 2025 delivery decreased on the Tokyo exchange, while Brent oil for July 2025 delivery on the ICE exchange and WTI crude for June 2025 delivery on the Nymex saw increases. These fluctuations are influenced by factors like OPEC+ decisions to increase oil production.
In conclusion, while a localized conflict between India and Pakistan could trigger a surge in oil prices due to regional instability and supply chain concerns, the actual impact will depend on the conflict's duration and intensity, as well as global supply dynamics and any potential response from OPEC+.
