Ahead Today
G3: US ADP Employment Change, US Existing Home Sales
Asia: US ADP Employment Change, US Existing Home Sales
Market Highlights
Brent oil prices fluctuated wildly and made a huge roundtrip, rising all the way up to US$120/bbl from US$90/bbl previously, before falling back down closer to earth towards the same level it opened the week. The key driver was comments by President Trump that the Iran war could be ending soon (but not this week), that the operation was ahead of schedule, and that the military objectives could be described as “pretty well complete”. He also coupled these remarks with claims that the US has brought Iran’s missile capability down to 10% and that drone launches from Iran had decreased by 83%. What we do know from the UAE government as well is that drone and missile projectiles detected from Iran has fallen sharply on 9 March to 15 ballistic missiles and 18 drones, from 17 missiles and 117 drones the day before, and the peak of 28 missiles and 332 drones on 1 March. It is unclear whether this drop has been driven by an active choice by Iran, or by necessity due to actual supply and capability constraints from the Iran government.
What we do know is that Asian currencies were taken for a ride to some extent in the midst of all this beyond just oil, and certainly for good reason. Asia certainly has an outsized exposure to the Strait of Homurz, with 90% of the oil through the Strait going to Asian markets. In addition, Asian economies depend on the Middle East for around 65% of crude oil imports, 27% of refined petroleum, 17% for natural gas, and 45-50% for Natural Gas liquids such as propane – and these are just averages with certainly some markets more exposed than others each in their own different ways.
As we pointed out, this time is different for Asia in that the Strait of Hormuz crisis is not just about crude oil prices, but the potential for an looming energy shortage possibly sharply constraining economic activity, coupled with a multitude of indirect channels such as shocks to food production, travel, transportation, and tourism which could well look like a COVID-lockdown and Russia Ukraine combined shock.
That Trump has backed down to some extent is certainly good for the global economy and reduces the left tail risk of a global recession, but we may not be out of the woods yet. We would probably remain cautious for now for a few reasons.
- First, it is unclear whether both Iran and Israel have the same incentive structure as the US administration.
- Second, it is also unclear the extent to which the Strait of Hormuz can open in practice, given that much of the de facto closure has been driven by insurance premium spikes and risk aversion, and this may well continue.
- Third, with reports that some Middle East producers has had to shut in production, including in natural gas for Qatar which is notoriously difficult to start and restart, the actual impact to supply may well get worse before it gets better.
Nonetheless, better late than never – and Asian governments are breathing a tentative sigh of relief for now.