The US-Iran agreement lights up hopes of escaping Asia’s ‘thirst’ for oil

On June 17, the United States and Iran signed a preliminary agreement to end the conflict in the Middle East. In particular, Iran agreed to reopen the Strait of Hormuz – a maritime route that transports about 20% of global oil and gas supplies.

For nearly 4 months, the almost blockade of this strait has caused the world to lose about 1.15 billion barrels of oil, according to Kple. The crisis especially affects Asia, the main consumer market for Middle Eastern oil.

In some Southeast Asian economies, the government has had to impose a four-day work week, rationed diesel, restart coal power plants, promote ethanol blending and limit crude oil exports.

Even Philippine President Ferdinand Marcos Jr. also declared a national energy emergency in late March, with gas prices having increased about 40% since the conflict broke out. As energy supply pressure increasingly threatens growth, the agreement opens up hope for the region, according to the analysis team of investment bank ING (Netherlands).

“The US-Iran peace agreement is a positive signal for Asia, a region heavily dependent on imported energy and vulnerable to disruptions in the Middle East,” the group of experts said.

ING believes that Southeast Asia will benefit the most if oil prices fall, with the Philippines being typical. Economies that rely heavily on energy imports such as India and Thailand also hope to see transportation costs, food distribution and investment costs cool down.

Improved energy supply also helps South Korea and Japan’s growth is expected to be more positive. Korea’s petrochemical industry and Japan’s automobile exports to the Middle East have recovery prospects.

In addition, even if oil supply only partially recovers, the market will be less tense, thereby improving consumer and business confidence, especially in countries where fears of recent disruptions have significantly affected economic activity.

However, it takes time to quench the “thirst” for oil in Asian economies. ING’s base case assumes that about 50% of oil flows through the Strait of Hormuz are restored by the end of June and only fully return by the end of 2026.

Similarly, many experts warn that it will take many months for oil flows to return to pre-war levels. According to Mr. Chen Chien-Ming, Associate Professor at Nanyang Technological University (Singapore), oil supply will not recover immediately.

“A round trip tanker between Singapore and Gulf countries can take one to two months, while many Asian countries are at their lowest inventory levels in years and energy prices are skyrocketing,” he said.

Wood Mackenzie expert Sushant Gupta predicts that oil reserves in Asia will continue to decrease until around August, before gradually recovering. “In the past three months, inventories in many countries have dropped to minimum levels. We do not expect to return to pre-war levels this year,” he said.

That’s not to mention some energy facilities damaged in the conflict, such as the world’s largest LNG export port in Qatar’s Ras Laffan, which cannot be re-operated immediately. Oil refineries cannot immediately restore operations.

The return of oil flow does not mean that energy prices will decrease quickly. According to Mr. Gupta, the Iran crisis has made many countries realize the importance of energy security. Therefore, heavily affected areas such as South Asia and Southeast Asia are likely to sharply increase their strategic oil reserves, even to higher levels than before the war.

Sharing the same opinion, Professor of Economics Pushan Dutt at the European Institute of Business Administration (INSEAD), said that Asian countries will increase oil purchases, at the same time China and the US also need to replenish their reserves. “So both supply and demand increased at the same time, slowing down the rate of price decline,” he said.

In addition, oil prices may also decrease slowly because investors need more information about the mine clearance process and clarity on sanctions. In particular, there are still doubts about the long-term stability of the agreement, in the context of very fragile US-Iranian relations and recent negotiations that have been continuously interrupted and resumed.

Associate Professor Chen Chien-Ming, for example, in the 14 points raised by Iran, demanding war compensation and releasing frozen assets are things the US cannot easily accept. In addition, Tehran also demanded that Israel withdraw from Lebanon and end all military activities, something Israel found difficult to agree to.

Ms. Kim Fustier, global oil and gas expert at HSBC, said the agreement is a positive signal, but evidence is still needed to show that it is actually implemented. According to Mr. Gupta, the market needs to understand that signing an agreement is only the first step. Expecting oil prices to fall sharply in the short term is unrealistic,” he said.