Asian economies began 2020 with a brighter outlook and hopes for reversing fortunes amid a truce in last year’s bruising US-China trade war.
But the shock killing of top Iranian military commander Qassem Soleimani by a US drone strike abruptly checked sentiment as markets weighed the new unforeseen risk of a possible US-Iran war.
Global markets and oil prices have whipsawed in recent days on Iran’s retaliatory strike against American military bases in Iraq and follow-up conciliatory statements from US President Donald Trump and Iranian Foreign Minister Mohammad Javad Zarif, signaling, at least for now, that the hostilities will not spiral into full-blown war.
Asian stock markets fell hardest on the US’s initial attack, while oil briefly surged above US$70 a barrel for the first time since the attack on oil facilities in Saudi Arabia last September.
But markets rallied and oil prices eased to around $65 per barrel when Trump claimed on Wednesday that Iran was “standing down” after no Americans were harmed in the targeting of US installations, and Iran’s Foreign Ministry said the strikes “concluded” Tehran’s response to Soleimani’s assassination.
“The indications from markets are that, overall, traders are taking this within their stride,” said Matt Simpson, a senior market analyst at Gain Capital in Singapore.
Indeed, market reaction to Soleimani’s killing was comparatively subdued compared with the Iran-backed Yemeni rebel attacks of September 14 on Saudi Arabian oil facilities that briefly halted about 5% of global output, causing US West Texas Intermediate (WTI) futures to climb around 14.8% before retreating to pre-attack levels.
“When the US struck on Friday (January 3), WTI rallied 4.7% on the day which pales in comparison,” Simpson told Asia Times. “So, whilst these events are having an impact on oil prices, it is less severe.”
Analysts note that an actual supply disruption, caused by a possible blockade of shipping lanes, would send prices soaring and immediately impact Asia’s largest net energy importers, including China, South Korea, Japan and Singapore.
Twenty-one million barrels, equivalent to about 21% of global petroleum liquid consumption, are exported every day through the Strait of Hormuz. Considered to be the world’s most important oil chokepoint, just over three-quarters of crude supplies that move through the narrow strategic waterway were shipped to Asian markets in 2018.
According to Energy Information Administration (EIA) estimates, the largest importers of crude moved through the shipping route in 2018 were China, India, Japan, South Korea, and Singapore.
If the channel, which is just 21 miles wide at its narrowest point, were blocked by Iran in a conflict scenario with the US that aimed to target American allies and their fuel supplies, analysts believe crude prices could easily top $100 per barrel.
“Iran is not yet likely to court a full-scale American attack by shutting down the Strait of Hormuz,” said Matt Gertken, a geopolitical strategist at BCA Research, a view widely held by traders and analysts.
“It is more likely to retaliate via regional proxy attacks, including cutting off oil production, pipelines, and shipping – at a time of its choosing.”
In a research note published after Soleimani’s killing, Gertken wrote that the Trump administration may now feel emboldened by the rise of US shale oil production and decline in oil import dependency.
Indicators suggest that the world’s largest economy is set to be a net petroleum exporter on an annualized basis for the first time in 2020.
“Iran would have to sustain an oil supply cutoff as large as the Abqaiq attack for four months in order to drive gasoline prices high enough to harm the US economy as a whole,” Gertken wrote. “This buffer may have convinced Trump he has plenty of room for maneuver in confronting Iran.”
Major oil consumers including the US and China keep millions of barrels in strategic reserves to offset any major disruption in global crude supplies. According to the International Energy Agency (IEA), global crude production could near a surplus of 700,000 barrels a day in the first quarter of this year, representing a comfortable supply cushion.
While market alarm has subsided with the US and Iran stepping back from the brink, there are certain expectations that simmering tensions could boil over again, either through additional reprisals from Tehran through regional proxy militias and cyber-attacks, or through further Trump administration escalations as he seeks to gain an edge in a heated election season.
“Further escalation would wipe out any benefits of the interim US-China trade deal and put the global economy on track for a recession,” said Jeffrey Halley, senior market analyst for Asia-Pacific at foreign exchange firm Oanda in referring to an improved global demand outlook ahead of the signing of a phase one US-China trade deal.
“Investors are likely to run aggressively for the exit door and move into gold and other precious metals” if a further action-reaction cycle pushes Washington and Tehran toward a declared war.
“Oil would of course surge along with a rise in the Swiss franc, Japanese yen and US dollar. Emerging market stock markets and currencies would suffer a wholesale rush for the exit door,” Halley predicts.
John Karr, director of operations at SophisticatedInvestor.com, believes the latest geopolitical crisis between the US and Iran doesn’t alone have the capability of destabilizing the global economy.
“The increased tensions between the two nations will likely have a short-lived impact on Asian economies,” he told Asia Times. “Unfortunately, the signs appear to be pointing towards a global recession, and this was prior to the emerging US-Iran geopolitical crisis.
“Uncertainties surrounding the US-Iran crisis could impact investor confidence until its resolution, but ultimately this geopolitical situation will have minimal effect on the global economy at large,” Karr said.
Liam Hunt, a market analyst with the same investment portal, said that all indications for now point toward de-escalation.
“In the unlikely event of sudden escalation between Tehran and Washington, look out for widespread stock sell-offs, WTI crude oil futures to jump above $75 per barrel, and 10-year Treasury yields to take a hit of 2% or more,” he forecasts. “In the meantime, markets are breathing a sigh of relief.”