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The Macro Brief – The Middle East: energy and shipping
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Kim Fustier and Parash Jain look at what the Middle East conflict means for oil and gas prices, transport and logistics.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Impact of Middle East Conflict on Markets
00:00:28
Speaker
This is the macro brief from HSBC Global Investment Research. I'm your host, Piers Butler, and it will come as no surprise that today's podcast is about the conflict in the Middle East. We'll be looking at what the latest developments mean for financial markets, and in particular, energy and transport. Longer gas prices have leapt higher, while disruption in the Strait of Hormuz, a key trade route, has seen tanker rates surge.
00:00:53
Speaker
So what's next? To discuss this, I'm joined in the studio by Kim Fusje, Senior Oil and Gas Analyst, and making his debut on the podcast is Parish Jain, Global Head of Transport and Logistics Research. Kim and Parish, welcome to The Macrobrief.
00:01:06
Speaker
It's my pleasure. Thanks. Glad to
Market Reactions to Conflict
00:01:08
Speaker
be here. So we're recording the podcast on Wednesday afternoon here in London. And obviously, the situation continues to evolve rapidly. But Kim, let's start with you. Let's recap first. Where are we in terms of the market's reaction? It's obviously not just the oil price, but the gas prices are spiked as well. We spiked a little bit of a pullback at the moment.
00:01:27
Speaker
Yeah, no, you're right. I mean, overall, the the market's initial reaction was sharp, as we expected. So at the time of recording this, Brent prices are up 11% from pre-crisis levels to just over $80 a barrel. They did briefly touch $85 a barrel on on Tuesday. um You're right about gas. European gas prices have soared by 50%. At one point they had almost doubled. Five-zero. Five-zero. Yes,
Strait of Hormuz and Global Supply
00:01:53
Speaker
yes. At one point they had almost doubled and they've retraced a little bit because this Hormuz story is not just about crude oil. It's also about gas and LNG. The region provides about 20% of the world's LNG. So this is the Strait of Hormuz. Correct. And yeah give us a sort of sense of why there's so many headlines surrounding this.
00:02:12
Speaker
Absolutely. It's hard to overstate the importance of the Strait of Hormuz. Roughly 20% of global oil and LNG flows, that's about 19 million barrels of oil per day, normally pass through the waterway.
00:02:25
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And the Strait is officially closed. ships Ship owners, insurers and navies are all on on high alert. ah mar Maritime insurance has been cancelled and Parash can talk more about this. So we are seeing a genuine supply crunch.
00:02:37
Speaker
There are alternative pipeline routes such as the Saudi East-West pipeline that goes to the West Coast, but it can only reroute about three to maybe five million barrels a day out of 19. So really the majority of Gulf crude oil is effectively stuck behind the strait.
00:02:55
Speaker
So it's ah it's a question how long it lasts. But Parish, can we bring you in
Maritime Disruptions and Logistics
00:02:59
Speaker
now? Not surprisingly, tanker rates have surged, but container rates have also picked up. So maybe drawing on your experience of previous crisis, how does this play out? What's the lead time for new capacity to respond to this?
00:03:13
Speaker
yeah so So far as straight up Hermos is concerned, it's pretty much an oil and a tanker story. So the ex exposure to the container is merely 2%. But it comes in addition of the Red Sea disruption, which means that over the past few weeks, you would have heard about some of the biggest industry liners like Maersk. We're talking about bringing the services back to the Red Sea and that that created a lot of lot of noise in the market. And with the disruption in the Strait of Hormuz, probably any possibility of a safe passage through the Red Sea also disappears. It means that probably more and more vessels will now have to take a cape of good hopes.
00:03:55
Speaker
And which means that probably 2026 in terms of demand and supply now looks much more balanced than a lopsided couple of weeks back. And ah just on this question of ah supply, I mean, what's the lead time?
Port Capacity and Supply Chain Stress
00:04:10
Speaker
So supply in terms of the order book, we are at ah at a decade high, right? The ships, they have a pipeline of deliveries coming. But what not many people realize is when we talk about container shipping, while there is an enormous amount of focus on the capacity on water,
00:04:28
Speaker
but because it's a supply chain, it's all about from container in the factory to the container in the warehouse. And as they say in logistics, you are as strong as your weakest link. right So what this trait of Harmas disruption does is that lot of ports in that region, especially some of the big trans-trippant port like Javelali,
00:04:48
Speaker
When the ships can't offload the boxes or unload load the boxes from there, then now those boxes need to be dropped off somewhere else. And then now somebody else need to go and pick those boxes from those places. And those type of situations create a lot of capacity being choked.
00:05:06
Speaker
And that creates eventually been reflected in the freight rates. I mean, anecdotally, we haven't seen ah full scale data in terms of the container tariffs in the long haul. But if you look at India and Middle East, which is relatively busier container trade route, and on just prior to this incidence, to the day after this incidence, the container freight it has gone up to eight to nine times. Wow.
00:05:32
Speaker
Off a low base, of course. Yes. But it it tells you about ripple effect. The second order of effects.
US Intervention and Market Confidence
00:05:38
Speaker
um The U.S. government has offered to escort and insure oil tankers. What's been the reaction in the market? are there Maybe it's a bit early to tell, but you you mentioned that, Kim and Parash. Is that something that you're sort of keeping an eye on?
00:05:51
Speaker
Is that likely to sort of ease the the congestion? So I think from from the commercial ships perspective, damage has been done. and probably bringing confidence back will require several weeks, if not months.
00:06:05
Speaker
Kim, on what can be done, does OPEC Plus have the ability to offset some of these production restrictions that are resulting from the Iran strike? Yes, but only on paper. um OPEC Plus sits on something like four, four and a half million barrels a day of spare capacity right now. But it doesn't matter as long as the Strait of Hormuz is closed, because the vast majority of that that four to four and a half million barrels a day sits behind the Strait of Hormuz. It's all concentrated in Saudi Arabia, the UAE, Iraq, Kuwait. So for now, it is completely inaccessible.
00:06:36
Speaker
Over the weekend as well, OPEC Plus announced a quota hike of just over 200,000 barrels per day. And frankly, it was it was not enough to calm the market because, it first of all, it is tiny in the context of a 19 million barrel a day supply shock. yeah But also that 200,000 barrels a day will be inaccessible for now.
00:06:54
Speaker
So they can produce it, but it still can't be transported. so Here's the catch. The longer the strait is closed, I think the greater the risks of eventual production shut-ins.
Extended Closure Implications
00:07:05
Speaker
Storage capacity eventually runs out. That has already started to happen. We've seen Iraq shut in very large fields to the tune of over a million barrels a day. That was yesterday on Tuesday.
00:07:17
Speaker
um So I think in in this crisis, the the real the the the real wild card is how long does the strait stay closed? yeah and And just to this point, and the idea is that the relationship is not linear, i.e. the longer the the situation persists, the greater the number of days it will take to unwind. As a rule of thumb, we often say is that if you see a congestion for a week, it typically takes three weeks to decongest that. Interesting.
00:07:45
Speaker
So that that is very key you should remember. And Kim, can you explain why the impact for oil and gas importing countries is queued towards Asia?
Asia's Energy Dependence
00:07:54
Speaker
Asia is really front and center here because they get very large part of their crude oil as well as their LNG from the region. So for China and India, the Middle East Gulf region represents about 50% of their crude oil imports. For some importers like Japan and South Korea, they're even more exposed with shares of 75% for South Korea, 90% in the case Japan.
00:08:17
Speaker
Europe is somewhat less reliant on Gulf crude. They buy a lot more from from the United States. However, they do import some jet fuel, so that's kerosene, and diesel as well from the region. That's up to 25, 30% of Europe's imports. So but it is also exposed to the spike that we've seen in refined products. This hasn't just been a crude oil story or even an energy story. It's also been about refined products. If you look at product prices at the pump for diesel, you will see them going up as well.
Gulf Air Traffic Disruptions
00:08:45
Speaker
Parish, coming back to you on air traffic for the Gulf states, that's been already been very severely disrupted. What's the knock-on impact of this, given it's not just about passenger traffic, but also air cargo?
00:08:57
Speaker
i mean, it's huge, right? Because Middle Eastern carriers are are the connectors between large part of Asia and Europe, right from Australia to North north Asia, all the way to Europe. And Middle Eastern carriers alone are like...
00:09:13
Speaker
13% of global freight capacity, 9% of passengers capacity, and that that completely disappeared. So you have already seen, i mean, there was an article, i think the day before, that the direct flight between Hong Kong and London prices has gone rocket high.
00:09:27
Speaker
And these are some of the early early signs. So if that capacity disappears, and as because of the disarray in supply chain, a lot of the auto companies, lot of semiconductor companies who relies on the just-in-time cargo, they will scratch for any capacity anywhere.
00:09:44
Speaker
And that will be seen almost imminently in the in the freight market. Just to finish on, you both talked to c clients. Parash, you're in London today and marketing
Investor Reactions and Scenarios
00:09:53
Speaker
for this week. ah what's What's the mood out there? I mean, are people kind of more on a wait-and-see basis or...?
00:09:59
Speaker
what What do we feel? People are more interested to understand like if anybody has any visibility of how long it will last. But from our perspective, from the naked eye, it's pretty simple that when such kind of things happen, oil prices go up.
00:10:15
Speaker
We generally see negative as for airlines, seen positive for the shipping lines. But if you take a step back and see if this persists, what are the knock on effect?
00:10:26
Speaker
On the oil and gas side, I'd say investors are trying to figure out the implications of various scenarios, whether this is a one-month disruption or a one-week disruption or a multi-month disruption, because the implications would be quite quite different. What does that do to oil inventories with obvious repercussions for for prices, right? So in which scenarios are we right now? What does Brent crude at $80 actually price in, right? And what are the contingencies in the system to deal with such a a large supply shock, which frankly, we we've never seen anything like this before, a 19 millimber a day supply
Strategic Reserves and Oil Flow Adjustments
00:10:59
Speaker
shock to the system. So in practice, we'll probably see if this lasts, we'll we'll start thinking about strategic reserves being used by IEA member countries. We'll start thinking about does China have to use its strategic reserves as well? Do flows around the world have to redirect? What happens to Russian sanctioned crude as well? So those those are all questions being considered by and by customers just now.
00:11:24
Speaker
So a bunch of scenario analysis keeping you busy. Absolutely. Absolutely. Well, thank you for your insight today. I'm sure we'll have you back because there's lots going on. But for now, thank you very much. Thank you. Thank you.
Access to Further Insights and Feedback
00:11:40
Speaker
It's a fast-moving situation in the Middle East, and you can keep up to date on our latest reports and videos from HSBC Global Investment Research by downloading our app from Apple's App Store or Google Play.
00:11:51
Speaker
And please listen to our sister podcast, Under the the Banyan Tree, where this week, hosts Fred Newman and Hera van der Linde look at what the conflict means for Asia's economies. Finally, if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com.
00:12:08
Speaker
This week's Macrobrief was hosted by me, Piers Butler, and produced by Tom Voughton. Don't forget to like and subscribe to the podcast. Thanks very much for listening, and we'll be back next week.
00:12:43
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.