Mideast Turmoil Highlights Asia’s Crude Vulnerability

Threats to physical oil supplies set off by recent missile strikes in Iran and Israel may have receded, but the 12-day conflict brought into focus the reliance that top Asian buyers have on the Mideast and the potential consequences of a sustained supply disruption from the critical region. Some Asian players started sketching out contingency plans to buy expensive arbitrage crudes in the unlikely event Iran tried to block passage through the Strait of Hormuz, a key chokepoint for Mideast oil supplies. Flows have continued virtually unabated, but the flare-up in tensions has underlined the vulnerability of countries like Japan, South Korea, China and India. Many Asian buyers firmly believed Iran would not take the drastic step of shutting Hormuz. Such a move would have hurt the interests of China, which buys most of Iran’s crude, and of Iran itself. It would also jeopardize relations with neighboring Arab states and risk further intervention by the US. Still, in the time between the unprecedented US attack on Iran’s nuclear sites early Sunday morning and an Israel-Iran ceasefire announcement on Tuesday, people had become “more serious about diversification” and were looking closely at mostly uneconomical arbitrage options as a backup, according to multiple Asian refining sources.