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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. The crude oil and natural gas markets have been forced to consider the possibility of an energy crisis. All of this is after the US and Israeli military action in Iran. Now shipping through the Strait of horm Moves is at a near standstill. You know, roughly twenty percent of global
oil exports passed through this narrow waterway. It was late Monday when an advisor to the Islamic Revolutionary Guard said Iranian forces will set fire to any ship attempting to pass through the strait. I think the quote was, we won't allow a single drop of oil to leave the region. For a closer look, I'm joined by Bloomberg Stephen Stepchinsky. Stephen is team leader for Asia Energy and he joins from our studios in Singapore. Stephen, thank you for being here.
What is the biggest question in your mind right now as we look at the various scenarios, If I can put it that way, I.
Think there are two things that the market is watching very very closely. Obviously, as you talked about the Strait of Hormoves, is a key waterway. How long will it stay shut and what ships will be willing to go through. A lot of companies, like Japan's Mitsui Osk Lines has said that they will not allow their ships to go through. They've told them to salt. Meanwhile, other ship owners are dealing with rising insurance prices. How much are they willing
to pay? Can they get the war insurance that they need, because a lot of those war insurance terms are actually getting canceled this week as the situation on folds. That's horror moves. The other is infrastructure, right, so horror moves that could quickly be resolved if there's some sort of piece deal and flows could resume again. But if infrastructure, oil exports, gas production facilities, pipelines are damaged as the conflict unfolds, then we're seeing an oil or gas market
where where production is affected potentially for longer. You know, I have to remind you that the Middle East is a major producer of oil and gas for consumers all around the world, from Europe to Asia, and already over the last twenty four hours we saw Iranian drones hit a Saudi Arabia's largest refinery, and we've also seen Qatar's ras Lafa and Energy Complex get Hit that includes the world's biggest look fed natural gas export facility. It provides twenty percent of the world's LNG.
So China, i know, is a big buyer of Iranian crude, even though that crude oil has been sanctioned by the US. Do you have a sense of the impact on China if there is a prolonged closure of the strait or it becomes difficult for those vessels to reach Chinese mainland refineries.
So in a way, Beijing has been preparing for this for years, you know. I think if you think about the twenty twenty two energy crisis after Russia invaded Ukraine and upended oil and gas markets, it actually led to some energy shortages in China, and since then Beijing has been working really hard to increase their own oil and gas production, find alternative supplies, increase coal production for power generation, as well as talk to other partners across the region.
China has turned more and more to Russia, for example, for oil and gas supplies as well. So if this let's look at oil. If this were to be prolonged, yes, oil would would be This would become an issue for some refiners in China, they'd have to scramble on fine alternatives. But we are entering a period of a glut in the oil market, and if you're just talking about sheer barrels, there is supply available, they have to pay the price.
Maybe the supply wouldn't be available for a few weeks or month, but it wouldn't lead to widespread shortages or anything in China. Meanwhile, they also have very large inventories that they've built up. Now turning to gas, which is used in industries to a small degree power generation as well as heating, that could be more of an issue. Qatar depends. Qatar supplies thirty percent of China's LNG imports. They're a major supplier to the country and that would
be harder to immediately replace. They would have to scramble to other exporters like Australia, the US, or maybe Southeast Asian suppliers, and that could result in higher prices as well as maybe some curtailment of gas to certain industries.
So in the States, we are told the Trump administration has no immediate plans to release oil from the Strategic Petroleum Reserves. That would be tapped in case of an emergency such as this. Can you give me a sense on the magnitude or the size of the petrol olium reserves that China has access to.
I mean, it's also massive. I mean I think to give you some context, the oil market last year, it would have been much weaker if it weren't for China's enormous buying of oil. But for most of the year they were filling up those reserves, among the largest reserves on Earth. I mean, you have to remember that China is the world's biggest crude importer and they take this energy security very seriously. So yes, they do have mass or reserves on the same scale as other large oil
producers or importers. I think one other thing to note though, is unlike other countries, China has been to a degree reducing its dependence on gasoline as well. They've been building an enormous ev fleet. Like if you go to Beijing or Shanghai and you hire a taxi, it will most
likely be an electric vehicle. So not only do they have the reserves, but they're also changing their entire economy to depend more on things that are fueled by electricity, and that means that they depend more on coal, and coal a lot of which they produce domestically.
There are two countries that I'm thinking of, in particular in the Asia Pacific, both of which happen to be US allies and both are heavy oil importers. I'm thinking of Japan and South Korea. What is the situation as it relates to those countries So so.
Far, we've heard from both of them that the situation to a degree is under control. They're not looking to release their own strategic reserves yet, but they are in touch with their allies and they are following the situation very closely. I do to remind you that we're just three or four days into this, and so there is enough fuel on the water. That being said, you know, if we if we do see a situation where oil supplies are cut off for weeks, then they are going
to have to scramble. They're going to have to release their own reserves and have to work with International Energy Agency to do a global potentially a global release, and on top of that find alternative suppliers. Again, there is enough oil in the market, so we're not necessarily in a panic, and you're seeing that represented in Brent oil prices. Right, prices rose from Brent to the seventy five seventy eight
dollars level. When the war in Ukraine was happening. In twenty twenty two, oil prices for Brent were well above one hundred dollars. There's more of a crisis feeling. So the US could come to the aid as well to Korea and in Japan and could be a larger supplier of crude to those countries, but that also takes time. The US is far away and a lot of that oil would have to go around the Cape of Good Hope through the Panama Canal, and that takes time to
get there. But there isn't quite a panic in Tokyo and Soul yet as far as what we're reporting.
So we're being told that both the UAE and CUTTER privately lobbied allies to persuade President Trump to keep operations against Iran very very short. Do you think can you imagine that the UAE or CUTTER would reach out to countries in the Apac region to try to put some pressure on President Trump.
I mean, when not just President Trump, but wouldn't they also want to put pressure on Iran? As well. You look at China, for example, China is an enormous buyer of Iranian oil. They're also a big buyer of products from Qatar and the UAE. So are they getting pressure to put also force on top of on top of Iran to try to come to a deal. Are they putting pressure on the United States? I mean, I think
this is a pressure point. The fuel, the supply of fuel that is so important to China, And while they do have alternatives, the longer this goes on, the more it risks China overall, it doesn't necessarily risk the United States. The US is the world's biggest oil and one of the big biggest oil exporters and the world's biggest LNG exporter.
In fact, this benefits their producers. The US is in a very good spot at the moment, and if you look at just natural gas prices in the US, it is a fraction of the prices that are being paid by customers in Europe and Asia, just because it's so well insulated.
I'm remembering recently that the Trump administration put pressure on the Indian government to stop buying Russian crude oil. So when you consider the situation that India is in right now. If it's being squeezed to resist the temptation to reach out and tap into Russian crude oil, what type of situation is India in right now?
Yeah, I mean India is also in a challenging spot. You know, I think they have been over We had a big take story on the Bloomberg terminal and the website just this morning that kind of highlighted how Indian buyers, especially of natural gas, have been sort of scrambling. They depend on Koutar for about thirty percent of their LNG needs and the situation more than thirty percent actually, and
in the situation in Delhi is getting quite dire. They're looking at different scenarios, one of which is doing some sort of government to government deal with with different suppliers. So, yeah, they are getting squeezed by this and it's very unfortunate, and you're going to see a situation where refineries might need to go back to potentially look at the unsanctioned supply from Russia, maybe try to make deals with other potential partners or again. You know, this is a topic
that keeps coming up. Curtail supply, right, you know, curtail consumption, try to find ways to reduce demand at home so that the less supply that they get goes a longer way.
Before I let you go, Steve, and I have to ask about the impact that higher oil may have in terms of accelerating inflation. That was one of the things that manifest in the New York session where treasury yields started to rise quite a bit. I think both the two and the tenure were up around ten basis points. Is there a conversation in the Asia Pacific on the inflationary impact of higher oil?
Absolutely. You know, Asia is a big importer of oil and gas, and the higher prices does put more pressure on these countries. And you know, you look at just Japan for example. This was supposed to be the year where oil prices were going to fall, but instead prices are right because there was going to be a global glood of supply, but instead, because of the geopolitical risk,
prices keep rising. And that's putting a lot of pressure on Japanese households that for decades have been dealing with deflation. Now suddenly there's larger than expected increases in prices. Gas line prices are increasing. You know, companies have to deal with higher energy costs. Japan's power prices spot electricity price just on Monday popped up fifteen percent, is probably going
to rise even more. So you look at just Japan for example, the household has to pay more because the higher the prices are for oil, gas and coal, it actually directly increases power bills on a monthly basis. And it's not just su Japan issue. This is something that South Korea, China, India. Sitting here in Singapore, Singapore is a major buyer of Katari LNG. It affects all of us,
and it's something that's being closely watched and monitored. When it was supposed to be a here where all these prices were supposed to come down.
Steven, good stuff, Thank you so very much. We'll leave it there, Bloomberg Steven Stepchinski. He is team leader for Asia Energy. Joining from our studio in the Lion City of Singapore here on the Daybreak Asia Podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner. President Trump said earlier today the US will keep up its military offensive against Iran for as long as it takes. We
also heard from Secretary of State Marco Rubio. He said, the objective is to destroy Iran's ballistic missile program as well as its naval fleet and attacked owns. Here is Rubio.
No matter what, Ultimately this operation needed to happen. That's the question of why now. But this operation needed to happen because Iran in about a year or a year and a half would cross the line of immunity, meaning they would have so many short range missiles, so many drones that no one could do anything about it because they could hold the whole world hostage. Look at the damage they're doing now and this is a weekend Iran, imagine a year from now.
So that had to happen.
That a Secretary of State Marco Rubio, And it helps set up our conversation with Mona Yakubian. Mona is the director and Senior Advisor of the Middle East Program at CSIS. She spoke to Bloomberg TV host Devon Mann and David Nglaize, and Devon started the conversation with a question on the rationale behind the US and Israel striking Iran over the weekend.
I think there's still a very disturbing lack of clarity as to the rationale. I mean, we've heard numerous reasons raised, from Iran's nuclear and ballistic missile capabilities to addressing the leadership in Iran, et cetera. None of it really seems to make sense in terms of available intelligence reporting, none of which points to an imminent threat. And therefore this really looks more to have been a war of choice
rather than a war of necessity. And we are seeing play out now, just entering the fourth day of this conflict, the multiple downside risks from energy market hits, to US soldiers being killed in combat, to security risks, and American embassies being targeted to multiple countries now becoming embroiled in this conflict. We are truly watching a region wide conflagration unfold before our eyes.
So i'mon, among the many risks, what do you think is most pertinent at the moment? If I know, that's almost an impossible question to isolate that, But where do I need to be looking?
Well?
I think the energy markets are in particular significant given this part of the world's crucial role in both oil and gas markets, and your analyst that was on before me, was laying down these historic jumps in gas prices. I think The problem is we don't know the duration of this conflict obviously, and frankly, it's very hard to imagine that this is going to be a replay of the twelve.
Day war that we saw this past June.
This is far more complex and involves far many more countries, and of course, with the assassination of the Supreme Leader and questions about who's even in charge in Iran and what's Iran's risk tolerance? I would argue Iran's risk tolerance is very high because they are facing existential threats. And so if we are watching something that could last for weeks and maybe even months, that is going to have
enormous reverberations across global energy and shipping markets. And of course we also have to look at lives that are at risk across the region.
I mean, might not want to pick up on that this now involves many other parties. Might be a dumb question.
I don't know.
I don't have the answer. Why is Iran bombing its neighbors? So I get why, I get why they would target places with US basis, but Dubai for example, and how does that then affect those regional powers in their response to Iran I mean, I.
Think there are two ways to look at it. You're absolutely right, David.
I mean, on the face of it, they've managed to galvanize these Gulf countries frankly against Iran.
Iran is now completely alone.
These are countries that were advocating against conflict against it with Iran, and so in a way it does look sort of fool hardly, foolhardy and hard to understand.
On the other hand, if for Iran.
The stakes are existential, then at this point I think they are making a gamble that they are going to race up the escalation ladder and impose higher costs and sort of in a way, invite.
A prolonged conflict.
And that's exactly what they're doing, perhaps with the calculation that ultimately, especially these energy producing Gulf countries are going to really push hard on the United States to find an off ram to de escalate this conflict because of the disruption that it is causing. So in a way, Iran is taking a sort of an asymmetric approach to this.
We've been talking about a lot about the risk of a more wider regional war. I'm just wondering in terms of the Iran proxies right that the Hufis, the hes Blahs. You know, does Iran have a can maintain control of some of these groups here right now or is there actually a chance that they could actually mobilize.
Well, it's really interesting on I mean, we just saw in the last twenty four hours, among the different types of escalation that we've witnessed is the more intensive use.
Of Iran's proxies.
We see this most notably in Lebanon, where Hezbollah, which frankly is under greater Iranian influence than it's ever been undertook rocket attacks against Israel quite frankly, relatively weak rocket attacks.
They didn't cause any damage.
But this has now brought an onslaught an offensive by Israel against Lebanon, and so we'll have to see how that evolves. I think the key proxy that has yet to really raise its head again are the Houthis, and that will be significant if the Houthis choose to get involved.
Should they seek to re start attacks on shipping in the Red Sea to snarl the Babel Mendeb, another critical choke point in the area, then I think we could see the disruptions that were already watching unfold grow exponentially, and this could have an enormous impact not only on the region but globally.
Mona, just quickly, if you could, where does this leave the nuclear assets or the ability to specify the ability of Iran to enrich to a certain level, and do we circle back to a negotiating table at some point here on those.
Well, David, I mean there were already questions as to whether or not Iran had started to move back toward restarting its nuclear program. The program, the facilities certainly sustained significant damage in the US and Israeli strikes this past summer, and so there was no suggestion that Iran's ability to begin enriching uranium again was imminent. Perhaps they were looking to restart or start to repair those facilities, as some
of the imagery is showing. The US has gone back and hit some of these sites again, the US and israel I should say, and so I think Iran's nuclear capability remain dramatically curtailed.
That was Mona Yakoubian, director and Senior Advisor of the Middle East Program at CSIS, speaking with Bloomberg TV host Von Mann and David Nglace, bringing you their conversation here on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics
in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg