Analysts weigh impact of possible oil shock on Singapore economy after US strikes on Iran

SINGAPORE – Stock markets in Asia slid and oil prices soared on June 23 after

US air strikes on Iran’s nuclear facilities

raised the threat of further military escalation in a region that accounts for a third of global crude output.

But along with other regional markets, Singapore erased most of its losses as traders nervously awaited Iran’s response to the US attack. The Straits Times Index closed down 0.1 per cent at 3,879.26, after falling 0.9 per cent earlier.

Global oil benchmark Brent, after

surging as much as 5.7 per cent to US$81.40,

was also little changed at US$77.05 a barrel at 5.06pm.

However, oil prices are far from 2025’s low of US$60.23 a barrel on May 5.

The US on June 22 sent military jets to bomb three Iranian nuclear sites in a mission dubbed Operation Midnight Hammer.

Analysts warned that if Iran chooses to target in retaliation one of several US military bases across the region, it could invite counter-strikes by the US and its regional allies, and send Brent to highs of around US$139 a barrel seen during the onset of Russia’s invasion of Ukraine in 2022.

There are also fears that Tehran could opt to target crude infrastructure in rival suppliers in the Middle East, or orchestrate attacks on ships in the Red Sea by encouraging Yemen-based Houthi rebels to harass vessels.

But the worst-case scenario would be an Iranian blockage of the

Strait of Hormuz

– the narrow waterway at the entrance to the Persian Gulf through which a fifth of the world’s crude output passes.

The International Monetary Fund estimates that a 10 per cent rise in oil prices lowers global gross domestic product (GDP) growth by 0.1 to 0.2 percentage point. World Bank estimates suggest that a 10 per cent increase in oil prices raises overall inflation by 0.4 percentage point in a median economy.

An oil price shock is transmitted rather quickly to prices of household essentials as they tend to push electricity tariffs and transport costs higher. Everything from imported food items to bus and train fares will become more expensive if oil prices maintain the surge from US$60 a barrel in early May to current levels.

“A move above US$90 per barrel would constitute an oil price shock,” said Ms Madhur Jha, Standard Chartered Bank’s global economist and head of thematic research, adding that oil price shocks are reflected in headline inflation within a quarter.

StanChart placed Singapore sixth in a global ranking of economies sensitive to rising oil prices. The Republic’s net oil imports account for 4.5 per cent of GDP and transport costs constitute 13.1 per cent of its all-items inflation basket, the bank estimates.

Mr Jonathan Ng, OCBC Bank’s Asean economist, said that given the fragile market risk sentiment, a wider escalation could send Brent crude prices to as high as US$120 a barrel. This would be a 73 per cent spike on Brent’s closing price of US$69.36 on June 12, the day before Israel launched its first attack on Iran.

“Under this circumstance, further sanctions on Iran and blockages of trade routes in the Strait of Hormuz cannot be ruled out, as this is a critical transit route for oil from the Middle East to the rest of the global oil market,” he said.

According to the International Energy Agency, an average of 20 million barrels per day of oil, or about 30 per cent of global seaborne oil trade, passed through the Strait of Hormuz between January and October in 2023.

However, so far, Iran has not attacked any US assets in the region and has not made any moves to curtail the flow of oil and gas through the Strait of Hormuz. The Iranian Parliament has endorsed closing the strait, but experts believe it has no effective authority to do so. The final decision lies with Iran’s Supreme Leader, Ayatollah Ali Khamenei.

Still, the cost of hiring a ship to carry crude from the Middle East to China has jumped close to 90 per cent since before the June 13 Israeli attacks on Iran began. Earnings for vessels carrying fuels like petrol and jet fuel have also leaped, as have insurance premiums paid to shippers.

There are some mitigating factors when considering the closure of Hormuz.

Saudi Arabia and the United Arab Emirates – the world’s top oil exporters – have the capacity to divert a meaningful portion of their current Gulf exports through pipelines, which would mitigate the adverse effects of any closure or major shipping disruptions.

The alternative ports are, however, in the Red Sea and thus vulnerable if Yemen decides to join the fray. The US halted its bombing campaign against Yemen’s Houthis in May after the Iran-aligned group agreed to stop targeting shipping in the Red Sea.

Also, short of an effective blockade, there are many ways Iran can disrupt shipping lanes across Hormuz, for example, by sending small boats and drones to disrupt the movement of oil tankers.

A meaningful curtailment of oil and supplies would hit net energy importers worldwide, with Asia’s largest economies likely to be among the most vulnerable.

Around 80 per cent of oil flows from the Gulf is destined for Asian markets, with India, China, Japan and South Korea accounting for around two-thirds of those flows.

Singapore, which has a significant refining capacity and is a major oil trading hub, imports more crude oil and petroleum products than it exports. For instance, in 2023, Singapore imported US$29.8 billion (S$38.5 billion) worth of crude, making it the world’s 12th largest importer. 

Dr Chua Hak Bin, co-head of macro research at Maybank, said that Singapore, being a net energy importer, will see some negative impact on its pace of economic growth if oil prices rise and are sustained at about US$100 a barrel.

The aviation and shipping sectors will likely be disproportionately impacted due to higher fuel costs and disruptions to transport routes, he added.

There could also be second-order impact on Singapore’s trade-driven economy if its major trading partners, such as China, Japan and South Korea, suffer.

Mr Heng Koon How, head of markets strategy at UOB, said there are already increasing uncertainties regarding the health of the global economy, with the World Bank recently cutting its forecast for global growth by 0.4 percentage point to 2.7 per cent on higher tariffs.