Why are markets failing to respond to the impending second wave of Iran energy shocks targeting Asia and the globe?

(SeaPRwire) –   Global oil stockpiles are nearing their lowest level in eight years, as Goldman Sachs analysts project that reserves could drop to 98 days’ worth of global demand by the end of May. 

But when you look at the markets, the situation appears fairly positive. 

Brent crude prices are lingering around $100 per barrel, down from an April peak of $126 following the Iran war. West Texas Intermediate (WTI) crude also held steady at roughly $100 a barrel last week, down from its April 7 high of $113. (Both benchmarks remain well above their pre-war levels.)

“The market has grown complacent,” says Chen Chien-Ming, an associate professor of operations management at Singapore’s Nanyang Technological University (NTU). “There’s an obvious oil shortage, yet the futures market is significantly depressed by market-shifting news and investors’ hopeful belief that the war will conclude soon.”

Industry experts and analysts predict that oil prices could surge beyond $150 per barrel if the Strait of Hormuz stays closed until the end of June. Chen calculates that 20 million barrels of oil flowed through the Strait daily before the war; with it shut for nearly 70 days, the current supply gap totals over 1 billion barrels.

Asia, which depends heavily on Middle Eastern fuel supplies, is particularly vulnerable. “Asia is the most exposed region, as most countries—except Malaysia and Indonesia—are major oil importers,” notes Dutt Pushan, a professor of economics and political science at INSEAD business school. “They’re also highly industrialized, so they require large amounts of natural gas and electricity.”

A long-term supply disruption could push some of the region’s more fragile economies into recession, while also raising food and fuel costs for hundreds of millions of individuals.

Financial Markets vs. Physical Reality

Global oil stockpiles were in “relatively robust condition” when the Iran conflict began, JPMorgan analysts stated in an April 30 report. This buffer has acted as a “shock absorber,” dampening the rise in global energy prices. 

“Prices aren’t yet unbearable,” Chen from NTU remarks. “We haven’t hit a point of no return just yet.”

That critical point, though, is quickly drawing near. JPMorgan estimates that only 800 million barrels—out of the 8.4 billion barrels in storage—can be practically used without pushing the entire system into operational strain. By late April, governments had already released 280 million barrels to soften the conflict’s impact.

“Floating storage can be accessed rapidly, but only a portion of onshore stockpiles—about 580 million barrels—is easily available,” wrote JPMorgan analysts led by Natasha Kaneva, head of global commodities research. “The remainder is essentially tied up in pipeline fills, minimum tank levels, and other operational limitations.” 

Russia’s 2022 invasion of Ukraine also drove oil prices up, but experts argue that today’s disruption is fundamentally different from what occurred after that conflict began. The price surges then stemmed from sanctions on Russian oil, not from any supply disruptions. 

“Russia still managed to sell its oil to markets where buyers were available,” says Sushant Gupta, Asia-Pacific research director for refining and oils at consulting firm Wood Mackenzie. “We can’t equate the Russia-Ukraine war with the Iran conflict, as the latter involves a two-month physical loss of supply.”

A ‘Backwardated’ Market

Even with the steep decline in oil stockpiles, Gupta notes the market is “backwardated”—a term meaning futures prices are lower than current spot prices. This situation is partly driven by investor optimism that the U.S.-Iran conflict will soon end.

“The market’s view is that this conflict will eventually conclude and Middle Eastern oil will resume flowing,” Gupta explains, adding that Wood Mackenzie expects oil to start moving again by late May.

(WTI crude rose to just above $100 per barrel on Tuesday after U.S. President Donald Trump stated that the ceasefire with Iran was on “life support.”)

Another potential factor is that traders have already factored in “demand destruction”—the idea that high prices lead to a permanent decrease in oil demand as consumers and businesses adjust their behavior. 

Several developing Asian countries have already taken steps to reduce energy consumption. The Philippines switched to a four-day workweek when the Iran war began, while Thailand’s government encouraged workers to wear short-sleeved shirts and set air conditioners to 78.8 degrees Fahrenheit or higher. On May 10, Indian Prime Minister Narendra Modi called on citizens to cut down on international travel and work from home.

“This year, we’re observing negative oil demand growth—lower than last year’s,” Gupta stated. “Oil supply growth from non-OPEC nations such as Brazil, Guyana, and the U.S. will likely be enough to meet demand by 2026.”

Second-Order Impacts: Food Crisis, Currency Collapse, Recession

As the conflict continues, Asian nations may soon face second-order consequences of the Iran energy crisis, with a higher risk of recession being a top concern. 

“Looking at economic history, there’s no exception: every oil disruption is followed by a recession,” Chen from NTU says. “Prices rise across the board, people spend less, governments collect less tax and have to take on more debt—all of which fuels inflation. It’s a self-reinforcing cycle.”

Many of Southeast Asia’s frontier markets—including Thailand, Vietnam, and the Philippines—could also experience currency depreciation or even collapse, according to Pushan from INSEAD. “These major oil-importing countries might run out of foreign exchange reserves, leading investors to lose confidence in their economies and pull their money out.” Asia’s most vulnerable currencies, like the Indian rupee, Indonesian rupiah, and Philippine peso, have already hit record lows during the Iran war.

Economies dependent on agriculture may also reduce planting activity due to rising diesel and fertilizer prices. This could, alarmingly, lead to food shortages. 

“We’re right at the start of Asia’s first planting season, but farmers in countries like Thailand lack the financial resources to plant crops,” Chen concludes. “If people end up going hungry, we need to be prepared for that.”