Key Takeaways:
- Oil's rebound above $104 a barrel threatens Asian currencies, MUFG says
- Strait of Hormuz tanker traffic declines as geopolitical risk premia rise
- Net oil importers in Asia face wider trade deficits and import cost pressures
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Oil's rebound above $104 threatens Asian currencies, MUFG says
Oil's rebound to multi-month highs is set to pressure Asian currencies as escalating Middle East disruptions curtail tanker traffic through the Strait of Hormuz, according to MUFG Bank.
The rebound in oil prices is likely to weigh on Asian currencies as "geopolitical risk premia rise and tanker traffic through the Strait of Hormuz declines," Lloyd Chan, senior currency analyst at MUFG Bank, said in a research report. The warning comes as Brent crude averaged $104.50 a barrel in the June quarter, up from $68 a year earlier, with Middle East production dropping by about 12 million barrels during the Strait of Hormuz closure, according to Reliance Industries' earnings call.
The transmission chain is direct: every $10 increase in oil prices widens the current account deficit of net importers such as India, Thailand and the Philippines by an estimated 0.3 to 0.5 percentage point of GDP, based on historical International Monetary Fund data. Asian currencies have already absorbed pressure from a stronger dollar, and an extended oil rally compounds the drag through higher import bills and fuel subsidy costs that strain fiscal positions.
The Strait of Hormuz handles about 21% of global oil trade, and the current disruption follows a pattern established during the 2019 attacks on Saudi Aramco facilities, when oil spiked 15% in a single session and Asian currencies from the Indian rupee to the Indonesian rupiah weakened 1% to 3% over the following month. This time, the shock is broader: freight rates have surged to 10 times normal levels, insurance costs have multiplied, and some Middle East crude premiums have reached nearly $20 a barrel, compared with the typical $2 to $3, according to Reliance management.
Net importers face the heaviest burden
India, which imports about 85% of its crude requirements, is the most exposed among major Asian economies. The rupee has already declined against the dollar this year, and a sustained oil rally would force the Reserve Bank of India to choose between defending the currency with reserves or allowing depreciation that feeds imported inflation. Thailand and the Philippines, both net oil importers with tourism-dependent economies, face similar trade-offs.
The oil price surge also complicates the inflation outlook for Asian central banks. Higher fuel costs feed directly into consumer prices, potentially delaying rate cuts that markets have been pricing for the second half of the year. The Bank of Thailand and the Philippine central bank have both signaled caution on easing, and an extended oil rally would reinforce that stance.
Russia's loss of more than 40% of its refining capacity from Ukrainian strikes has removed a major source of diesel and gasoline supply from global markets, further tightening refined product markets. Russia has banned exports of gasoline and diesel, according to Reliance's oil and gas team, compounding the supply squeeze from Middle East disruptions.
The counterweight has been demand destruction: high prices have reduced consumption, with gasoline demand dropping by about 500,000 barrels a day and diesel by nearly 1 million barrels a day globally, according to Reliance's analysis. China's absence from crude markets during the crisis also helped cap prices, but its return to buying could provide additional support to oil.
For Asian currencies, the outlook depends on how long the Hormuz disruption persists. If tanker traffic normalizes within weeks, the currency pressure should ease. If the disruption extends into the third quarter, the cumulative impact on trade balances and inflation could force several Asian central banks to adjust their policy paths.
This article is for informational purposes only and does not constitute investment advice.
