Middle East Conflict Drives Oil Market Volatility: Asia's Energy Vulnerabilities Emerge

The US-Israeli military strikes against Iran have triggered significant oil market disruption, with Brent crude prices surging to $82 per barrel—the highest since January 2025—and the critical Strait of Hormuz shipping route coming to a near standstill. This conflict has exposed Asia's vulnerability to energy supply shocks as the region remains heavily dependent on imported oil and gas.

Key Market Developments

Oil Price Surge

• Brent crude, the global benchmark, surged as much as 14 per cent to more than US$82 per barrel—the highest since January 2025, according to Bloomberg data
• Asia's oil and gas trade deficit stood at 2.1 per cent of gross domestic product, Morgan Stanley noted in a research report
• Oil prices rose by the most in four years amid the US-Israeli war on Iran and the effective closure of the Strait of Hormuz
• Freight costs climbed sharply alongside crude as traders priced in the war's consequences

Strait of Hormuz Disruption

• The Strait of Hormuz, which usually handles about 20 per cent of global oil trade, has seen commercial traffic come to a standstill following the conflict
• Shipowners and traders are largely avoiding the Strait of Hormuz that links the Persian Gulf with the Indian Ocean
• Asia's manufacturing-intensive, export-reliant economies are "more sensitive" to oil price volatility than Europe or the US, according to Morgan Stanley

Asia's Energy Exposure

• Asian countries are "heavily reliant on imported oil and gas" and could suffer "serious economic fallout" after the US and Israeli strikes on Iran
• Morgan Stanley calculated that a sustained US$10 increase in oil prices would have significant impact on Asia's economies
• India's foreign policy doctrine of "dehyphenation"—maintaining parallel relations with conflicting countries—has been put to the test by the conflict

Regional Implications

The conflict is creating significant ripple effects across the region. The Iranian conflict is putting India's cherished Middle East neutrality to the test, while millions of migrant workers in the Gulf are facing increased danger as the conflict rages on. The disruption has also led to operational changes by major airlines, with Cathay Pacific suspending all Middle East operations following the US-Israeli attack on Iran.

Market Outlook

Analysts note that while the Iran conflict should not pose an immediate threat to China's crude supply, it will add urgency to the country's energy security drive. The situation has also accelerated China's push to become an "energy powerhouse" as it seeks to reduce vulnerability to global supply chain disruptions.

As the situation evolves, the oil market remains highly volatile with potential for further price increases if shipping disruptions persist along the Strait of Hormuz. Market participants should closely monitor developments in the Middle East, particularly regarding the status of the Strait of Hormuz, which continues to be a critical choke point for global energy supplies.

Source: Morgan Stanley research report, SCMP analysis, SCMP oil price report