*Brent crude futures climbed as high as $115.16 a barrel on Friday, 23 October, their highest level since 4 May, as Houthi attacks on Saudi Arabia renewed concerns about oil supplies and raised the prospect of higher import costs and inflation in India.

The international benchmark rose as much as 1.8% in London before retreating to around $114.70. US West Texas Intermediate crude also traded above $100 a barrel.

The increase came amid diminishing hopes of an early resolution to the US-Iran conflict and renewed attacks by Yemen’s Iran-aligned Houthi movement on Saudi Arabia, one of the world’s largest oil exporters.

Saudi Aramco ordered the evacuation of its headquarters in Dhahran on Thursday as fighting intensified. There was no confirmed disruption to Saudi oil production associated with the evacuation, but the development heightened concerns about the security of the region’s energy infrastructure.

For India, which imports close to 90% of its crude oil requirements, the immediate risk is a sustained increase in energy costs. Higher international prices can raise the country’s import bill, increase demand for dollars and weaken the rupee, making subsequent purchases even more expensive.

The pressure is arriving as the Reserve Bank of India seeks to contain inflation without placing excessive strain on economic growth.

Why oil prices are rising

The latest increase in crude prices reflects concerns about future supplies, even though oil shipments from the Persian Gulf have recovered substantially from the disruption that followed the outbreak of the US-Iran war.

Tanker-tracking estimates cited by MarketWatch indicate that regional exports have returned to within about 10% of their prewar levels. Maintaining those shipments, however, has required producers and traders to adjust transportation arrangements.

Saudi Arabia has relied on its East-West pipeline to move crude to Red Sea export terminals, while traders have used alternative shipping arrangements, including ship-to-ship transfers, to maintain flows from the Gulf.

The recovery has reduced immediate supply shortages without removing the risk of further interruptions.

The Strait of Hormuz, between Iran and Oman, remains key to oil shipments from Iraq, Kuwait, Saudi Arabia and the United Arab Emirates (UAE). Saudi Arabia and the UAE have pipelines capable of bypassing the strait, but those routes cannot necessarily accommodate all their normal seaborne exports.

Houthi attacks have introduced additional uncertainty around Saudi infrastructure and shipping near the Red Sea. The Bab el-Mandeb strait, which connects the Gulf of Aden with the route to the Suez Canal, is another important passage for international trade.

A renewed interruption could increase freight and insurance costs, delay deliveries and force buyers to seek alternative cargoes.

The market is also weighing the possibility of a prolonged conflict. Mike Waltz, the US ambassador to the United Nations, told the Financial Times that the confrontation could remain unresolved a year from now.

Relatively low inventories have added to supply concerns. US crude stocks have fallen for three consecutive weeks to approximately 412.5 million barrels, according to figures cited by MarketWatch.

Brent was heading for a third consecutive weekly gain on Friday, despite the recovery in physical exports from the Gulf.

India’s growing reliance on Middle Eastern crude

India’s exposure to another disruption has increased following a substantial shift in its oil purchases. Middle Eastern suppliers accounted for about 54% of India’s crude imports in September, compared with 32% in August, according to ship-tracking data reported by Reuters on 22 October.

Purchases from the region rose to around 2.8 million barrels per day, their highest since February, as Gulf shipments recovered and regional suppliers offered more competitive prices.

India had increased purchases of Russian crude earlier in the conflict to compensate for disruptions to Middle Eastern supplies. That pattern began to change as Gulf exports resumed.

Russian imports declined about 14% from August to 1.8 million barrels per day in September. Russia’s share of India’s purchases fell to 33.5% from 46.6%, although it remained the country’s largest individual supplier.

Imports from Iraq rose to 830,000 barrels per day from 171,000 barrels per day in August.

Middle Eastern suppliers are geographically closer to India, potentially reducing transportation costs and delivery times. Discounts on Russian crude have also narrowed, making some Gulf grades more competitive on a delivered-cost basis.

But changing suppliers provides limited protection against a broad rise in international prices. Even discounted cargoes generally become more expensive when global benchmarks increase, while shipping costs, insurance premiums and exchange-rate movements can add to the final bill.

Higher crude prices threaten India’s import bill

India’s crude import bill had already increased sharply before Friday’s rally.

The country spent $15.4 billion on crude imports in September, up 47% from a year earlier, while import volumes increased about 7%, according to Petroleum Planning and Analysis Cell figures.

The Indian crude basket averaged $116 a barrel during the month, compared with about $70 a year earlier.

For April through September, India’s crude import bill reached $90.6 billion, an increase of 46.4% from the corresponding period a year earlier.

The much larger rise in expenditure than in volumes indicates that higher prices accounted for most of the additional cost.

A prolonged period of expensive crude would place further pressure on India’s external accounts.

Because oil imports are largely paid for in dollars, a higher import bill increases demand for foreign currency. That pressure can become more pronounced when overseas investors are withdrawing funds from Indian assets or reducing their exposure to emerging markets.

The rupee ended Friday at 94.94 per dollar, compared with 94.82 on Thursday, weakening for a second consecutive session.

Earlier in the week, the currency had strengthened to around 94.30, its highest level in more than six weeks, before reversing course amid rising oil prices and weaker global risk appetite.

Reuters reported that oil importers were expected to increase dollar hedging in response to the rally. A weaker rupee raises the local-currency cost of crude even if international oil prices remain unchanged. When both move against India, the effect on import costs is greater.

Petroleum product exports can partly offset the cost of crude imports, while services earnings and remittances support India’s external accounts. Nevertheless, a sustained rise in oil expenditure could widen the current account deficit, depending on developments in other trade and income flows.

RBI’s currency measures offer some protection

The Reserve Bank of India (RBI) has tools to ease pressure on the foreign-exchange market, although they cannot eliminate the additional cost of imported oil. A special dollar window for oil marketing companies is one such measure. By providing a designated channel for their foreign-currency requirements, the RBI can reduce the need for large oil importers to purchase dollars directly in the broader market during periods of stress.

Such arrangements can help smooth currency trading and prevent concentrated dollar demand from amplifying short-term rupee volatility.

They do not, however, lower the international price of crude or remove the underlying need to finance imports. Their effectiveness also depends on the terms, scale and duration of the facility.

The central bank can additionally intervene in foreign-exchange markets to contain disorderly movements, subject to its policy objectives and available reserves.

For India, the distinction is important. Measures that stabilize the rupee can limit one source of additional import costs, but they cannot fully offset an extended increase in dollar-denominated oil prices.

How expensive crude could feed inflation

Higher crude prices present a more complicated inflation problem than the increase in the import bill alone suggests.

International crude prices do not automatically translate into higher retail petrol and diesel prices in India. Domestic fuel prices are influenced by central and state taxes, oil marketing companies’ pricing decisions and government policy.

If retail prices remain unchanged while crude becomes more expensive, fuel retailers may face lower marketing margins. If the additional costs are passed on, consumers and businesses pay more.

Diesel is particularly important because of its widespread use in freight transportation, agriculture and industrial activity.

Higher diesel costs can increase the expense of moving food and manufactured goods, potentially feeding into consumer prices beyond the energy sector.

Aviation fuel prices affect airlines, while petroleum-derived inputs influence production costs for chemicals, plastics, synthetic fibers and packaging.

The extent of the inflationary impact depends on how long crude remains expensive, how much of the increase businesses pass on and whether the rupee continues to weaken.

The government also faces trade-offs.

Reducing fuel taxes could protect consumers but would reduce public revenue. Holding retail prices steady could squeeze oil marketing companies’ margins, while allowing prices to rise would expose households and businesses to higher costs.

The consequences for inflation would therefore depend as much on domestic pricing decisions as on movements in Brent crude.

Higher oil costs complicate RBI’s interest-rate outlook

The RBI raised its benchmark repo rate to 5.50% earlier this month and adopted a calibrated tightening stance as inflationary pressures broadened. Minutes of the October monetary policy meeting indicated that policymakers saw limited scope for rate cuts, with subsequent decisions likely to involve either holding rates or tightening further.

A sustained increase in crude prices could strengthen the case for additional monetary restraint if higher transport and production costs begin spreading through the economy.

But expensive oil can also weaken growth by reducing household purchasing power and increasing operating expenses for businesses. Higher interest rates would add to borrowing costs at a time when companies and consumers may already be adjusting to more expensive energy.

The rupee adds another consideration. Currency depreciation makes imported goods more expensive in local terms and can reinforce inflationary pressures beyond the petroleum sector.

Indian equities ended lower on Friday, 23 October, extending their losing streak to four sessions as higher oil prices added to concerns about corporate earnings, foreign investment flows and interest rates.

The Nifty 50 fell 0.39% to 22,600, while the Sensex declined 0.17% to 73,123.83. Both indices recovered substantially from their intraday lows, but the rebound was insufficient to prevent weekly losses of 2.35% for the Nifty and 2% for the Sensex.

Selling was heavier in smaller companies. The Nifty Midcap 100 lost nearly 6% over the week, while the Nifty Smallcap 100 declined more than 7%.

Higher crude prices can reduce profitability for businesses that depend heavily on transportation, fuel or petroleum-based raw materials.

Airlines, logistics companies and manufacturers are particularly exposed when costs rise faster than they can increase selling prices.

Oil producers may benefit from higher realizations, while refiners and fuel retailers face differing effects depending on their margins and pricing arrangements.

Government bonds also reflected inflation concerns. India’s benchmark 10-year bond yield stood at 7.48% in morning trading on Friday, up from about 7.46% at Thursday’s close.

The rise in yields reflected concerns about inflation and monetary tightening, although lower US Treasury yields provided some support to Indian debt.

Oil was not the only factor influencing markets. Global equities were under pressure as investors questioned the returns on heavy artificial intelligence infrastructure spending. The Nasdaq 100 fell 2.9% on Thursday, while the S&P 500 declined 1.2%. That broader retreat from risk-sensitive assets contributed to pressure on emerging markets, including India.

Foreign portfolio outflows can weaken the rupee at the same time that expensive crude increases importers’ demand for dollars, creating an additional challenge for policymakers.

What could determine the next move in oil

The direction of crude prices will depend heavily on whether Middle Eastern exports continue recovering or face another interruption. Improved shipping security, reduced hostilities and sustained flows through the Strait of Hormuz could ease concerns about future supplies.

Further attacks on Saudi energy infrastructure, renewed disruption to tanker movements or escalation involving Iran could increase those concerns. Inventories will also influence how markets respond. When commercial oil stocks are relatively low, unexpected supply losses can produce larger price movements because buyers have fewer immediately available alternatives.

For India, the more consequential question is how long crude remains expensive.

India’s refiners have demonstrated their ability to adjust purchases between Russia, the Gulf and other suppliers as commercial conditions change, analysts said, adding that diversification, howver, cannot fully protect an oil-importing economy from a broad increase in global crude prices.

The government’s fuel-pricing choices and the RBI’s management of inflation and currency volatility will determine how much of that pressure reaches households and businesses, they added.