Singapore, Asia markets fall as oil surges after US airstrikes on Iran, raising fears of a supply shock
SINGAPORE - Stock markets in Asia slid and oil prices soared on June 23 after US airstrikes on Iran's nuclear facilities raised the threat of further military escalation in a region that accounts for a third of global crude output.
Singapore's Straits Times Index dropped 0.55 per cent as at 10.34am.
The global oil benchmark Brent traded at US$76.75 a barrel, up 1.68 per cent, after surging 5.7 per cent to US$81.40 earlier in the morning.
The United States on June 22 sent military jets to bomb three Iranian nuclear sites in a mission dubbed Operation Midnight Hammer.
Analysts warned that if Iran chooses to target in retaliation one of the several US military bases across the region, it could invite counter strikes by the US and its regional allies, and send Brent to highs around US$139 a barrel seen during the onset of Russia's invasion of Ukraine in 2022.
Economic consequences of a move to block and cut supplies of crude and liquified natural gas flowing through the Strait of Hormuz - a narrow waterway on the shores of Iran that links the Persian Gulf with the Gulf of Oman and, ultimately, to the Indian Ocean and the rest of the world - could be even more disastrous.
The International Monetary Fund estimates that a 10 per cent rise in oil prices lowers global gross domestic product (GDP) growth by 0.1 to 0.2 percentage points. The World Bank estimates suggest that a 10 per cent increase in oil prices raises headline or all-items inflation by 0.4 percentage points in a median economy.
An oil price shock is transmitted rather quickly to prices of household essentials as they tend to push electricity tariffs and transport costs higher. Everything from imported food items to bus and train fares will become more expensive if oil prices maintain the surge from US$60 a barrel in early May 2025 to current levels.
Ms Madhur Jha, Standard Chartered Bank's global economist and head of thematic research, said: ''A move above US$90 per barrel would constitute an oil price shock,'' adding oil price shocks are reflected in headline inflation within a quarter.
StanChart placed Singapore 6th in global ranking of economies sensitive to rising oil prices. The Republic's net oil imports account for 4.5 per cent of GDP and transport costs constitute 13.1 per cent of its all-items inflation basket, the bank estimates.
Mr Jonathan Ng, OCBC's Asean economist, said that given the fragile market risk sentiment a wider escalation could send Brent crude prices to as high as US$120 per barrel. This would be a 73 per cent spike on Brent's closing price of US$69.36 on June 12, the day before Israel launched its first attack on Iran.
''Under this circumstance, further sanctions on Iran and blockages of trade routes in the Strait of Hormuz cannot be ruled out, as this is a critical transit route for oil from the Middle East to the rest of the global oil market,'' he said.
According to the International Energy Agency, an average of 20 million barrels per day of oil, or about 30 per cent of global seaborne oil trade, passed through the route between January-October 2023.
However, so far Iran has not attacked any US assets in the region and has not made any moves to curtail flow of oil and gas through the Strait of Hormuz. The Iranian parliament has endorsed closing the strait, but experts believe the parliament has no effective authority to do so.
Still the cost of hiring a ship to carry crude from the Middle East to China has jumped close to 90 per cent since before the June 13 Israeli attacks on Iran began. Earnings for vessels carrying fuels like gasoline and jet fuel have also leaped, as have insurance premiums paid shippers.
There are also some mitigating factors when considering the closure of Hormuz.
Saudi Arabia and the United Arab Emirates - world's top oil exporters - have the capacity to divert a meaningful portion of their current Gulf exports through pipelines, which would partially alleviate the adverse effects of any closure or major shipping disruptions.
The alternate ports are however in the Red Sea and thus vulnerable if Yemen decides to join the fray. The US halted its bombing campaign against Yemen's Houthis last month after the Iran-aligned group agreed to stop targeting shipping in the Red Sea.
The closure of Hormuz is always flagged as a risk whenever tension arises in the Middle East.
But so far, despite Iran's repeated threats to do so, it has yet to follow through, due to the adverse consequences for its own oil outlet, let alone the potential response from the international community.
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