[SINGAPORE] Oil and liquified natural gas (LNG) buyers in Asia have been unsettled by the Iranian parliament greenlighting a plan to close the Strait of Hormuz. The sea passage between the Persian Gulf and the Gulf of Oman is a critical choke point through which passes more than 20 per cent of global oil and LNG supplies – a majority of which are bound for Asian markets.
While a full blockade is unlikely given how it would directly undermine Iran’s own interest, even marginal disruptions could spike insurance costs and force Asia to confront its reliance on the choke point.
Oil price spikes would also put pressure on regional central banks that are on track to cut interest rates to spur growth, warned market watchers.
Following US’ attacks on Iran’s three nuclear sites, the Islamic Republic’s state-owned media reported that its parliament had on Sunday (Jun 22) approved a measure to close the Strait of Hormuz. While the parliament’s decision is not binding, a final decision would rest with top Iranian security officials.
Washington has called on Beijing to dissuade Iran from shutting down the strait following the news.
Cedric Chehab, chief economist at BMI, said: “The odds of the closure of the Strait of Hormuz have risen sharply.”
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Based on cryptocurrency-based prediction platform Polymarket, the implied probability of Iran blocking one of the world’s most critical maritime choke points by the end of 2025 had shot up to 60 per cent, as at 8 pm on Sunday.
Right after US’ strikes, the Brent crude briefly surged above US$80 per barrel. Before the conflict, oil prices had largely hovered between US$60 and US$75 a barrel since August 2024.
Oil markets have been waiting for Iran’s further actions. During Asian trading hours on Monday, Brent crude futures had gained 2.6 per cent to about US$77.4 per barrel as at 9 am Singapore time, while US West Texas Intermediate crude futures had risen 2.8 per cent to US$75.9 a barrel.
Bank of Singapore’s commodity strategist Sim Moh Siong noted that markets are wary of a “tail risk”, arising from the increasing possibility of the worst-case scenario of a Hormuz blockade.
“While it (the likelihood of the tail risk event) has increased a lot, it is still considered as a low-probability event. But if it does happen, it could have very disruptive, very severe consequences,” he warned.
The Strait of Hormuz is the exit route from the Persian Gulf for around 25 per cent of the world’s oil supply – including from Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Iraq and Iran – and most of the world’s spare production capacity, according to the International Energy Agency (IEA).
Sim added that Iran would directly hurt its own oil exports and relationships with the Gulf states if it decides to close the choke point.
BMI’s Chehab shared the same view, adding that an attempt at closure could spark Israeli intervention and potential larger military responses from the US, raising the threat of a regime change.
Pang Lu Ming, senior analyst at Rystad Energy, highlighted that even though Iran’s ability to close the Strait of Hormuz fully is challenged, the situation undoubtedly increases the risks for any vessel passing through the water body.
“This will result in players having to price in the risk (of) supply disruption, and an increase in insurance costs,” he added.
Asia is most vulnerable
Some 84 per cent of the crude oil and condensate, and 83 per cent of the LNG that moved through the Strait of Hormuz in 2024 went to Asian markets, estimated the US Energy Information Administration.
China, India, Japan, and South Korea were the top destinations for the crude oil moving through the strait to Asia, accounting for a combined 69 per cent of all Hormuz crude oil and condensate flows last year, noted the agency in a report released on Jun 16.
“Asian economies would be significantly and directly impacted by any interruption to supplies from the Strait of Hormuz, given that most of their seaborne energy imports flow through there,” noted Chehab.
He highlighted that about 94 per cent of Japan’s oil imports come from the strait; that figure is about 68 per cent for South Korea, 51 per cent for China, and 46 per cent for India.
IEA’s energy outlook report released last October showed that more than 50 per cent of South-east Asia’s crude imports came via the Strait of Hormuz in 2023.
Similarly, most of the LNG cargoes from Qatar and the UAE, the two leading exporters in the region, have been flowing towards Asia, noted Rystad Energy’s Pang, highlighting that 34 per cent of China’s LNG imports have been reliant on the two countries, while both India and Bangladesh have been more than 60 per cent reliant.
“Should there be a disruption in supply, these buyers will have to seek additional volumes from other suppliers, which will drive up the price of spot LNG,” he said, adding that the market’s immediate concern is to meet prompt LNG demand in case of disruptions to cargo from the Gulf.
Central banks’ challenges
Given Asia’s heavy reliance on the energy imports from the Strait of Hormuz, any supply shock would put Asian central banks in a very difficult situation, noted BMI’s Chehab.
“On the one hand, monetary policymakers would need to raise interest rates in order to address the pass-through inflationary pressures from higher oil prices. But on the other hand, they would want to cut interest rates in order to support growth, which is already slowing for most economies,” he said.
Meanwhile, as the US transformed into a net exporter of energy from an importer, the greenback strength has also been increasingly tied to oil prices, highlighted Bank of Singapore’s Sim.
“When the oil price goes up, you have a stronger US dollar, and that, in turn, means more difficult situations for the rest of Asia, because now they also have to deal with a potentially weaker Asian currency against the US dollar, amidst higher oil prices,” he explained.
While the US dollar has remained depressed this year, providing Asian central banks the flexibility to cut rates, a quickly rising greenback in response to “a big shift in risk aversion” would further pressure these banks to keep monetary policy settings tight, noted Chehab.
