High oil prices, Iran fallout from Hamas attack bigger worries for Asia than supplies

Rising oil prices following escalating geopolitical tensions in the Middle East have started to ring alarm bells for Asian refiners, but near-term concerns around supplies are less of a worry due to plentiful cargo flows from Russia as well as from exporters other than the Persian Gulf region.

Hamas' surprise attack on Israel has fanned worries of a long-drawn period of geopolitical turbulence in the Middle East at a time when oil markets have already been facing a squeeze in global supplies, while demand has strengthened, led by jet fuel. This has rekindled the debate on oil crossing the $100/b threshold again. Hamas, a military and political organization, has been linked to Iran in the past.

"Asia's biggest concerns are uncertainties on supplies arising from potential disruptions to physical flows following the attacks, as well as a possible spike in prices. What kind of conclusions Washington draws from this on Iran would also be a key factor for the global oil market," said S&P Global Commodity Insights Head of Global Oil Demand and Asia Analytics Kang Wu.

Crude prices rose Oct. 9 following Hamas' attack and Israel's military action in response.

"While the price increase remained relatively moderate, hovering between 2% and 4%, it is important to recognize that this market reaction is largely driven by sentiment, and confusion, and does not address the broader issue that could potentially lead to a significant escalation of the conflict," said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.

"At the center of these concerns lies the question of Iran's involvement, its role in all this, and Israel's targeted responses," he said.

The escalation puts the oil market's focus firmly on Iran. Depending on how Washington views it, this could bring ratcheting US sanctions, increased OPEC+ tensions and heightened risks for energy infrastructure and shipping across the Middle East. Around 500,000 b/d or more of Iranian oil exports could be at risk, according to S&P Global.

Breathing space

Analysts and traders said that Asian refiners were not unduly worried about supplies with countries like India and China snapping up plentiful volumes of crudes from Russia and other non-Middle Eastern suppliers.

"Russian supplies have surged ahead to become India's primary source of crude oil in 2023," said Sumit Ritolia, refinery economics analyst at S&P Global.

Russian crude flows reached 1.8 million b/d over January-September, accounting for 38% of India's total oil imports, rising from 11.2% during the same period in 2022, according to S&P Global. As a result, the share of Middle Eastern crude decreased from 63%, or 2.9 million b/d, over January-September 2022 to 45%, or 2.1 million b/d, over January-September this year.

"Looking ahead to the upcoming festive season from October onward, it is expected that India's crude oil imports from Russia will continue to be substantial," Ritolia said.

In China, Russian crude imports rose to about 2.1 million b/d from January to August, compared with 1.7 million b/d during the same period in 2022, according to S&P Global.

"Russian crude flows to China this year would be strong. Some independent refineries continue to purchase ESPO blend regularly although some other plants choose the cheaper Iranian grade. And there are also state-owned plants, which are interested in Russian crude," said Sijia Sun, senior China oil analyst at S&P Global.

South Korea, Japan

Industry sources in North Asia said the conflict would have little to no material impact on crude oil import flows.

"Apart from the sentiment-driven and speculative price spike that we may see in the paper market, Asian refiners are not worried about their regular sour crude spot and term trade flows," said a feedstock and logistics manager at a Japanese refiner.

A feedstock manager at a South Korean refiner said, "I simply can't see how Israel's retaliation would disrupt Asia's sour crude trades. Top OPEC members like Saudi Arabia and the UAE have always prioritized key Asian customers and they have been respecting their term supply contracts with Asian buyers despite their strong production cut commitments."

Consumer and business sentiment across key Northeast Asian economies has been fragile and oil price's fresh upward momentum to test the $100/b mark is the last thing that economic policy decision makers would want to see, said fixed-income market analysts at Japan's Daiwa Securities and South Korea's Meritz Securities.

Refining margins won't hold up when high prices hit demand, especially when private-spending and business sentiment are both so weak due to high household debt, rising loan repayment costs as well as dismal goods and services exports to China, according to a Korea Petroleum Association analyst and middle distillate marketers at South Korean and Japanese refiners.

The oil market has been hopeful of easing economic sanctions on Iran. South Korea's release of frozen Iranian assets in August had significantly raised hopes across the Asian refining industry that they could be allowed to freely buy Iranian crude and condensate within the year or two.

"Once again, our hopes have been dashed. My guess is that there would be a greater international effort to cut off funding sources for Hamas militants and many fingers would be pointed at Iran," said a trader at a South Korean petrochemical maker.