Strait of Hormuz closure: oil prices, stagflation risk, and what it means for Asia

The world's most critical chokepoint falls silent

The Strait of Hormuz — the narrow passage between Iran and Oman through which approximately 20% of global oil trade and 20% of liquefied natural gas (LNG) supply flows — has been effectively closed to commercial shipping since late February, following joint US-Israeli military strikes on Iran.

The scale of disruption is without modern precedent. Roughly 20 million barrels of oil, alongside 10.8 billion cubic feet (Bcf) of LNG per day, ordinarily transit the strait. The exposure is compounded by the fertiliser trade — urea, ammonia, and other agricultural inputs — with up to 30% of global fertiliser exports also routed through the waterway.

The International Energy Agency (IEA) estimates that even with full utilisation of available pipeline bypasses, approximately 16 million barrels per day of oil flows remain at risk from a full closure. Strategic petroleum reserves held by the IEA and OPEC's spare capacity can offer only temporary relief against a disruption of this magnitude.

Adding to supply concerns, QatarEnergy — the world's largest LNG exporter — suspended production at its Ras Laffan facility, warning that a restart could take weeks to months following cessation of hostilities. The knock-on effect has been swift: north-east Asian LNG prices have more than doubled to $22.5/MMBtu, while Brent crude surged to close to $120 per barrel — a level last seen more than three years ago.

The asymmetric burden on Asia

The geographic distribution of Strait of Hormuz flows illustrates the region's acute vulnerability. According to the US Energy Information Administration (EIA), Asia accounted for approximately 84% of the crude oil and condensate shipped through the strait in 2024, with China, India, Japan, and South Korea collectively representing 69% of total flows.

The degree of exposure, however, varies considerably across the region.

Japan and South Korea face the most acute structural vulnerability. Both economies are heavily dependent on oil for energy generation. Japan imports approximately 95% of its crude from the Middle East, while South Korea sources roughly 70% of its oil — and a significant proportion of its LNG — from the region. Equity markets have reflected this strain: as of the close on 10 March, the Nikkei 225 had fallen approximately 8% since the onset of the conflict, while South Korea's KOSPI declined over 11% over the same period, with a circuit breaker triggered on 4 March following a single-session decline of 12% — the index's worst day of the episode.

While the governments of Japan and South Korea report crude inventories sufficient to cover 254 and 210 days of domestic supply respectively, a prolonged conflict would prove materially detrimental to export-oriented industries, including energy-intensive semiconductor manufacturing.

China's position is materially more resilient. The nation's structural reliance on coal, alongside meaningful additions to renewable capacity, limits its proportional dependence on oil within overall energy consumption. There is a possibility that Iran may selectively permit Chinese vessels passage through the strait, given that China absorbs approximately 80% of Iranian crude exports. Kpler data indicates China held approximately 1.2 billion barrels of crude stockpiles as of January 2026, providing roughly 108 days of import cover even under a scenario of zero new inflows — a figure extendable further through maximising domestic production. From an inflation perspective, China's ongoing deflationary environment may provide an initial buffer against rising energy input costs. A key risk to monitor, however, is whether producers absorb cost increases rather than passing them through to end users — a dynamic that would shield consumers in the near term but progressively erode corporate margins, with broader implications for earnings and equity valuations.

Share of primary energy consumption from oil — Asia

Share of imported petroleum and other liquids as a proportion of total energy consumption

Stagflation fears and shifting safe-haven dynamics

When commodity prices remain elevated for an extended period, they exert upward pressure on both producer and consumer prices, intensifying inflationary dynamics. Simultaneously, geopolitical instability weighs on consumer and business sentiment, acting as a brake on global economic activity. The combination — decelerating growth alongside rising prices — is the stagflation scenario markets are most acutely focused on at present.

The International Monetary Fund (IMF) has estimated that every 10% sustained increase in oil prices reduces global economic output by 0.1–0.2%, while adding 0.4 percentage points to global inflation. With prices currently running approximately 30% above pre-conflict levels, the IMF's framework implies a potential 1.2 percentage point addition to global inflation — before accounting for the direct disruption to fertiliser supply chains that this crisis uniquely presents.

At the onset of the conflict, risk-off sentiment predictably drove equities and high-yield bonds lower while providing support to the US dollar. More significant, however, is that developed market government bonds — including US Treasuries and German Bunds — fell alongside gold prices despite these assets typically commanding safe-haven status. The primary driver is market expectations that elevated commodity prices will feed through to broader inflation, potentially compelling central banks to maintain interest rates at current or higher levels for longer, thereby undermining the conventional safe-haven appeal of duration assets. This creates a particularly challenging policy backdrop: raising rates to combat imported inflation risks suppressing already fragile domestic demand, while holding rates steady or easing risks entrenching price pressures across economies.

The duration question dominates

The central variable for financial markets is the duration of the disruption. Despite unprecedented intraday swings in commodity prices, broader market reactions have remained relatively contained — the MSCI World index has declined only 2.8% since the onset of the conflict, a modest retreat when measured against the 28% rally recorded since 9 April 2025 following the Liberation Day rebound. This relative composure reflects market expectations of a near-term resolution, as evidenced by the shape of Brent crude oil futures pricing: the front-month contract trades near $87 per barrel, the third-month at $82, and the sixth-month at $77.

Major Asian indices performance since the outbreak of the war

That said, futures markets have been consistently wrong-footed by geopolitical escalation in recent weeks. Should Brent remain materially elevated — at approximately 30% above pre-conflict levels — for more than two months, the macroeconomic impact will begin to register in hard economic data, potentially forcing central banks into an adverse policy trade-off. Such a scenario would translate into more significant drawdowns across equities and other risk assets.

From a regional perspective, while neither the US nor China is immune to inflationary pressures, both are positioned to outperform regional peers. The US benefits from its status as a net energy exporter, while China's coal-heavy energy mix, domestic crude production capacity, and potential preferential access through the strait provide meaningful insulation relative to more exposed importers such as India, Japan, and South Korea. For the latter group, the window in which current reserve buffers remain adequate is narrowing — and beyond it lies a supply shock with few historical parallels and limited policy tools to offset it.

The figures stated in this article are as of 11 March 2026 unless otherwise stated. Past performance is not a reliable indicator of future performance.