Iran-Israel Conflict and Global Trade Impact: LNG Crisis, Freight Surge, and India’s Inflation Woes

Just as the global trade community began seeing a glimmer of relief from ballooning freight costs, a storm is brewing once again — this time in the form of a confrontation between two of West Asia’s most influential powers. The Iran-Israel conflict and global trade impact are now re-emerging as a dominant concern, sending ripple effects across oil markets, stock exchanges, and strategic shipping lanes.

The tension has already triggered sharp market reactions. India’s benchmark Sensex plunged 573 points on Friday, highlighting the anxiety gripping financial sectors worldwide. The fears aren’t misplaced — at the heart of the geopolitical firestorm lies the Strait of Hormuz, a chokepoint through which nearly a quarter of the world’s oil and a significant share of global LNG flows.

Strait of Hormuz at Risk: Oil Supply Chokepoint

Analysts warn that if Iran decides to retaliate by blocking the Strait of Hormuz, global energy security could be severely compromised. This narrow passage carries 20–25% of the world’s oil shipments and is a lifeline for liquefied natural gas exports from Qatar and the UAE, both crucial suppliers to India.

Although India has ceased direct oil imports from Iran since 2019 due to U.S. sanctions, any disruption to global supply chains still sends shockwaves through the Indian economy. Goldman Sachs has projected a potential dip of up to 1.75 million barrels per day (b/d) in Iranian crude output for the next six months. Even if OPEC+ steps in to offset half of this, crude prices could skyrocket past $90 per barrel, with the investment bank forecasting a pullback only by 2026 as supply lines recover.

Iran-Israel Conflict: Indian Economy in the Crosshairs

The timing of this conflict could not be worse for India, which had just begun to benefit from easing inflation. With retail inflation cooling to a 75-month low of 2.82% in May 2025 — thanks to price drops in fruits, cereals, and pulses — the Reserve Bank of India had announced an unexpected 50 basis point cut in the repo rate.

However, the central bank also issued a sobering caveat: “Monetary policy is left with very limited space to support growth.” With oil imports comprising a significant chunk of India’s import bill, any prolonged price escalation could reignite inflationary pressures and stall growth momentum.

Iran-Israel Conflict: Energy Infrastructure on the Edge

While energy infrastructure has not yet been directly targeted, the danger is looming. Israel has shut its Leviathan gas field, a major supplier to Egypt and Jordan, as a precautionary move. Iran, on the other hand, has reported no immediate damage to its oil facilities but stands on precarious ground.

Iran’s refining capability stands at 2.2 million b/d, with an additional 600,000 b/d of condensate splitter capacity. In May alone, it churned out 4 million b/d of crude and condensate. But as per S&P Global, its exports might plummet below 1.5 million b/d this month — a significant dent that could further tighten the already stretched global supply.

Freight Rates Surge Again: Exporters Brace for Longer Voyages

Shipping and logistics — the lifeblood of global trade — are once again feeling the tremors of the crisis. Just a few weeks ago, conditions in the Red Sea had begun to normalise. Ships were cautiously returning to the shorter, cost-effective route through the Suez Canal.

That optimism now appears premature. The escalation in the Iran-Israel conflict and global trade impact means a likely return to the longer and more expensive Cape of Good Hope route. This detour not only adds 10–14 days to shipping time but also increases insurance premiums, tightens vessel availability, and inflates overall freight rates.

According to the Federation of Indian Export Organisations (FIEO), exporters had begun to regain confidence. But with renewed hostilities, those hopes have quickly faded. “A full-blown conflict could dismantle all recent gains in trade logistics,” an FIEO spokesperson noted.

LNG Flow Crisis: Suez Canal Traffic Plummets

The liquefied natural gas (LNG) market, too, is in turbulence. Kpler data shows a dramatic plunge in LNG shipments via the Suez Canal — from 34.94 million tonnes in 2022 to just 4.15 million tonnes in 2024. Meanwhile, LNG volumes rerouted via the Cape of Good Hope surged fivefold in the same period.

India, heavily reliant on LNG imports from Qatar and the UAE, stands at a precarious intersection of energy insecurity and macroeconomic instability. The shift in maritime traffic not only adds cost but also disrupts timelines for industrial and domestic consumption, risking power shortages and higher gas tariffs.

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