Oil surge puts Singapore on alert as Strait of Hormuz risk grows

[SINGAPORE] Oil’s latest rally may have little immediate impact on Singapore, but analysts warn that an escalation in Middle East tensions – particularly a blockade of the highly strategic Strait of Hormuz – could send prices of the commodity soaring past US$100 a barrel, dealing a blow to global growth and the city-state’s open economy.

Bank of Singapore commodity strategist Sim Moh Siong said the real risk lies in how long prices stay elevated, noting that a protracted spike above US$100 could pose a major drag on economic momentum in Singapore and globally. 

“The duration and the magnitude of the oil price rise matter,” said Sim, adding that the potential inflation or global economic growth impact from the current oil price upside of about US$5 per barrel is still “quite manageable”.

While most analysts view the probability of a full blockade of the Strait of Hormuz as low, cryptocurrency-based prediction platform Polymarket showed rising market concern. As at 6.30 pm on Monday (Jun 16), the implied probability of Iran blocking one of the world’s most critical maritime chokepoints had climbed to 31 per cent, from 24 per cent on Jun 11.

Oil prices continued their upward trajectory on Monday, with WTI and Brent crude futures settling at around US$68 and US$71, respectively, per barrel as at 10.40 pm.

This followed the 7 per cent spike on Friday – when hostilities first erupted – with traders pricing in growing risks to Middle East oil shipments.

Sim noted that aside from geopolitical tensions driving the rise, oil market fundamentals still point to weaker prices, given the ample spare capacity of the Organization of the Petroleum Exporting Countries (Opec).

Bank of Singapore maintained its oil price forecast at US$65 per barrel for the next 12 months.

All eyes remain on the Strait of Hormuz, through which nearly 20 million barrels – or about one-fifth of global consumption – flows each day. A blockade could severely limit the ability of Opec to utilise its spare capacity to support oil markets, in case of Iranian supply losses, warned analysts.

Mukesh Sahdev, global head of oil commodity markets at Rystad Energy, said in a note on Monday: “For now, the conflict appears likely to be contained, with the US potentially playing a central role, alongside significant diplomatic efforts from key players in the Middle East.”

Expecting oil prices to be capped below US$80 per barrel, he sees oil markets heading into a period of peak demand in the US, with signs of stabilisation rather than further escalation.

Janiv Shah, oil commodity markets vice-president at Rystad Energy, added: “We maintain our view that this is likely to remain a short-lived conflict, as further escalation risks spiralling beyond the control of key stakeholders.”

While elevated oil prices usually contribute to inflation, Bank of Singapore’s Sim noted that the Republic’s tools – including plenty of fiscal room – offset any severe impact.

OCBC chief economist Selena Ling cautioned that it remains too early to determine whether current crude price volatility will translate into lasting inflation pressures for the energy import-dependent nation.

Spillover effects

Gas, the main energy source for Singapore’s electricity, tracked the gains across the energy commodity complex as oil prices surged. However, the country’s reliance on long-term contracts has so far insulated it from price volatilities roiling energy markets, including gas and liquefied natural gas (LNG).

Similar to crude’s overcapacity situation, market fundamentals should restrain the oil spikes from spilling over to gas markets.

Kaushal Ramesh, Rystad Energy’s gas and LNG research vice-president, said the question is not about how high gas prices can go, but how quickly they will fall back down and stay depressed.

He noted that sluggish China demand and macro risks would hurt the global economy’s potential to absorb high prices, on top of additional LNG supply hitting the market from North America.

Nonetheless, the rising geopolitical tensions inducing market volatilities have highlighted the need for countries to strengthen their energy supply chain – Singapore included, presenting a case for regional interconnection, noted Raksit Pattanapitoon, Rystad Energy’s lead analyst of renewables and power for the Asia-Pacific.