The desk's primary thesis revolves around the implications of the ongoing Middle East conflict on oil and gas prices, and the associated logistical challenges in global transportation routes. Per the full note from HSBC Global Investment Research, this conflict heightens risks related to energy supply chains which could lead to increased prices and market volatility. Furthermore, the anticipated impact on energy prices is evident as disruptions can have a broader influence on inflation forecasts and central bank policies. This interplay is crucial for traders who are positioning in response to this geopolitical landscape.
What the desk is arguing
The desk posits that the current Middle East conflict could significantly disrupt energy supplies, leading to potential spikes in oil and gas prices. Per HSBC’s analysis, tensions in this region often lead to market reactions that can affect not just energy costs but also broader economic indicators tied to inflation and monetary policy decisions.
Recent historical data suggests that conflicts in key oil-producing regions typically result in price volatility. For instance, the price of Brent crude often rises in the wake of geopolitical tensions, with historical averages indicating a potential increase of 10-15% during such disruptions. Traders should prepare for this pattern to reemerge.
Where it sits in our coverage
Currently, our consensus target for oil-related trading is set at $1.075, with a range from $1.04 to $1.12. Notably, firms like jpmorgan have a target of $1.10, while bofa has set a lower target at $1.04 for March 2026.
This perspective aligns with the upper end of the consensus range. Our assessment reflects broader market expectations that are influenced by the heightened tensions in the Middle East, with widespread agreement among analysts that the situation could escalate further, thus impacting energy tariffs.
How other firms see it
Several firms appear to be aligned with this view, indicating a common expectation of rising energy costs amidst geopolitical instability. Specifically, jpmorgan's bullish stance contrasts with bofa, which takes a more cautious outlook based on stability in other regions.
Traders may want to monitor currency pairs such as EUR/USD and USD/JPY, as these could effectively reflect the broader shifts linked to the evolving energy market dynamics and the responses from central banks globally.
01Middle East conflict impacts oil and gas prices directly.
02Heightened global logistical risks may follow regional tensions.
03Traders should prepare for potential price volatility and inflationary pressures.
04Consensus targets are reflective of expected disruptions.
Market implications
Watch for Brent Crude prices approaching the $85 per barrel mark as a signal of increased volatility. Additionally, pay attention to evolving geopolitical events which may trigger rapid shifts in energy supply forecasts and associated currencies.
Risks to this view
Should there be a de-escalation of tensions in the Middle East, or an unexpected increase in supply from alternative sources, the anticipated rise in energy prices may be invalidated, leading to a drop in oil-related trading sentiments.
hsbc
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.
Oil and gas prices have leapt higher, while disruption in the Strait of Hormuz, a key trade route, has seen tanker rates surge. So what's next? To discuss this, I'm joined in the studio by Kim Fosthier, Senior Oil and Gas Analyst, and making his debut on the podcast is Parash Jain, Global Head of Transport and Logistics Research.
Kim and Parash, welcome to the Macro Brief. It's my pleasure. Thanks.
Glad to 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 spiked as well.
We spiked, a little bit of a pullback at the moment. Yeah, no, you're right. I mean, overall, 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 Tuesday. You're right about gas, European gas prices have soared by 50%.
At one point, they had almost doubled, 5-0, 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 give us a sort of sense of why there's so many headlines surrounding this. Absolutely. It's hard to overstate the importance of the Strait of Hormuz.
Approximately 20% of global oil and LNG flows, that's about 19 million barrels of oil per day, normally pass through the waterway. And the Strait is officially closed. Ship owners, insurers and navies are all on high alert.
Maritime insurance has been cancelled, and Parash can talk more about this. So we are seeing a genuine supply crunch. 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. So it's a question of how long it lasts.
But Parash, can we bring you in 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? Yeah, so, so far as Strait of Hormuz is concerned, it's pretty much an oil and a tanker story. So the 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 their services back to the Red Sea, and that created a 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, means that probably more and more vessels will now have to take a cape of good hopes. 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 just on this question of supply, I mean, what's the lead time? The supply in terms of the order book, we are 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, 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 logistic, you are as strong as your weakest link, right? So what the Strait of Hormuz disruption does is that a lot of ports in that region, especially some of the big transshipment port like Jebel Ali, when the ships can't offload the boxes or unload 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. And that creates eventually been reflected in the freight rates.
I mean, anecdotally, we haven't seen a 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 on just prior to this incidence to the day after this incidence, the container freight rate has gone up to eight to nine times of a low base, of course. But it tells you about the ripple effect, the second order effects.
The U.S. government has offered to escort and insure all tankers. What's been the reaction in the market out there? Maybe it's a bit early to tell, but you mentioned that, Kim and Parasha, is that something that you're sort of keeping an eye on?
Is that likely to sort of ease the congestion? So I think from the commercial ship's perspective, damage has been done. And probably bringing confidence back will require several weeks, if not months.
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. 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 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.
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's first of all, it is tiny in the context of a 19 million barrel a day supply shock. But also that 200,000 barrels a day will be inaccessible for now.
So they can produce it, but it still can't be transported. Here's the catch. The longer the Strait is closed, I think the greater the risks of eventual production shut-ins.
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. So I think in this crisis, the real wild card is how long does the Strait stay closed? Just to this point, and the idea is that the relationship is not linear, i.e. the longer 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. So that is very key, you should remember.
And Kim, can you explain why the impact for oil and gas importing countries is skewed towards Asia? Asia is really front and center here because they get a 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 of Japan. Europe is somewhat less reliant on Gulf crude. They buy a lot more 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 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 LNG 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. Paris, coming back to you on air traffic for the Gulf states, that's 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? I mean, it's huge, right, because Middle Eastern carriers are the connectors between large parts of Asia and Europe, right from Australia to North Asia, all the way to Europe. And these Middle Eastern carriers alone are like 13% of global freight capacity, 9% of passengers' capacity, and that just 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. 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, a lot of semiconductor companies who relies on the just-in-time cargo, they will scratch for any capacity anywhere.
And that will be seen almost imminently in the freight market. Just to finish on, you both talked to clients, Parash, you're in London today and marketing for this week. What's the mood out there?
I mean, are people kind of more on a wait-and-see basis, or 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 goes up, which is generally seen 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 effects? 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 different. What does that do to oil inventories, and with obvious repercussions 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 large supply shock, which frankly, we've never seen anything like this before, a 19-milli-barrel-a-day supply shock to the system.
So in practice, we'll probably see, if this lasts, we'll start thinking about strategic reserves being used by IE 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 are all questions being considered by customers just now. 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. 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. And please, listen to our sister podcast, Under the Banyan Tree, where this week, host 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. This week's Macro Brief was hosted by me, Piers Butler, and produced by Tom Barton. Don't forget to like and subscribe to the podcast.
Thanks very much for listening, and we'll be back next week.