By Jermaine Koh
If you’ve only got a minute:
- Escalating tensions involving the United States and Iran have raised concerns about disruptions to global energy supply, particularly through the Strait of Hormuz, a critical shipping route for global oil and liquefied natural gas trade.
- Energy price spikes can fuel inflation, affect interest rate expectations and slow economic growth if they persist.
- Geopolitical shocks often trigger short-term market swings. Maintaining diversified portfolios and focusing on long-term financial plans remains important.
Oil prices have climbed in recent weeks as tensions in the Middle East escalate, putting global energy markets back in focus.
The latest escalation involving the United States and Iran has raised concerns about potential disruptions to global energy supply. Iran currently accounts for around 3% of global crude oil production.
While this alone may not significantly disrupt global supply, geography plays a much larger role in shaping the risks.
Much of the concern centres on the Strait of Hormuz, one of the world’s most important oil shipping routes, which connects major oil-producing countries in the Persian Gulf to global markets.
This means that tensions in the region can quickly influence global oil prices, even before any actual supply disruption occurs.
The Strait of Hormuz
The Strait of Hormuz connects major Middle Eastern oil producers to global markets. According to CIO’s report, roughly 25-30% of global oil shipments pass through this narrow waterway.
Because such a large share of global supply depends on this route, even small disruptions could tighten global energy markets quickly.
In more severe scenarios, oil prices could climb toward US$100-150 per barrel if supply disruptions are prolonged.
For context, oil prices hovered around US$70-80 per barrel for much of the past year, meaning any sharp escalation could represent a significant increase in global energy costs.
Even without actual disruptions, markets tend to react quicky to geopolitical risks as traders adjust expectations.
Why higher oil prices matter beyond energy markets
Oil prices influence far more than just the energy sector.
Because oil is used across many parts of the economy, higher prices can ripple through industries such as transportation, manufacturing, logistics and agriculture, which rely heavily on energy to move goods and sustain production.
When energy costs rise, businesses may face higher operating expenses that can eventually be passed on to consumers.
In practice, higher fuel costs can eventually infiltrate everyday expenses. Airlines may raise ticket prices as fuel cost increase, while higher shipping costs can push up the prices of imported goods.
In Singapore, where most energy and fuel are imported, global oil price movements can influence everything from transport costs to the broader cost of living.
Over time, these pressures can contribute to higher inflation.
Asia’s greater exposure to oil shocks
The economic impact of rising oil prices is not evenly distributed across regions.
Many Asian economies rely heavily on imported energy, which makes them more exposed to oil supply shocks. Recent macro insights from DBS CIO reports highlight that Asia remains one of the most exposed regions to oil-driven growth shocks.
Countries such as Japan, South Korea and India import a large share of their oil from the Middle East, much of which travels through the Strait of Hormuz.
A 10% increase in oil prices could reduce Japan’s GDP growth by around 0.1-0.3 percentage points, while South Korea’s growth could fall up to 0.4 percentage points.
That said, the region has become somewhat less vulnerable over time as economies improve energy efficiency and diversify their energy sources through renewables and alternative energy supplies.
How markets have reacted so far
Geopolitical tensions often trigger swift reactions in financial markets.
Recent analysis noted that the latest escalation has already led to a rapid unwinding of some popular investment trades, particularly those involving markets outside the United States.
Prior to the conflict, investors had been increasing exposure to Europe and Asia. As geopolitical risks rose and energy prices surged, some investors reduced those positions, contributing to increased market volatility.
Historically, such periods often trigger a “flight to safety”, where investors shift capital towards assets such as gold or government bonds, which are commonly viewed as safer assets during periods of uncertainty.
Key developments to watch
While geopolitical events are difficult to predict, several indicators can provide useful signals.
1. Oil price trendsShort-term spikes are common during geopolitical tensions. But if oil prices remain elevated for months, the economic impact may become more significant.
2. Developments in the Strait of HormuzBecause a large share of global oil shipments passes through this route, disruptions here could quickly tighten supply and trigger further price volatility.
3. Inflation and central bank signalsPersistently high energy prices may influence inflation trends and affect how quickly central banks adjust interest rates.
Navigating uncertainty
Periods of geopolitical tension can make markets feel unpredictable. But reacting to every headline may not always lead to better outcomes.
Recent CIO insights continue to emphasise the importance of maintaining diversified portfolios and staying invested through market cycles. Rather than shifting entirely into cash, many strategies focus on balancing growth opportunities with defensive allocations.
Over time, markets tend to refocus on longer-term drivers such as economic growth, corporate earnings and innovation.
During periods of heightened uncertainty, a disciplined financial plan and a diversified portfolio can help provide resilience against short-term market volatility.
As global events continue to evolve, keeping a long-term perspective may remain one of the most effective ways to navigate market uncertainty.
