Oil surge rattles Asia markets again, clouding Fed rate-cut outlook

[SINGAPORE] Brent crude’s surge past US$110 a barrel sent Asian markets lower on Thursday (Mar 19), and is set to further jolt sentiment, as escalating strikes between Iran and Israel threaten critical energy infrastructure.

This followed the US Federal Reserve’s overnight decision to hold interest rates steady as concerns over climbing energy prices took centre stage.  

Aditya Saraswat, senior vice-president at Rystad Energy, noted that if Iran’s latest threats against five facilities in Saudi Arabia, the United Arab Emirates and Qatar come into fruition, at least 700,000 barrels per day of refined product capacity would be removed from global markets overnight.

This would hit diesel, jet fuel and naphtha supplies simultaneously in those three markets, said Saraswat. 

He added: “Oil prices, already at US$110 per barrel, would likely breach US$120 in the immediate aftermath, with further upside depending on the severity of the damage sustained.”

Energy prices in the spotlight for Asia

Analysts said markets are turning their attention towards the war’s duration and its potential to stifle growth and drive inflation.

Nigel Green, chief executive officer of deVere Group, noted that the geopolitical backdrop has shifted the policy landscape “sharply”. “Energy is now the dominant macro driver again,” he added.

Similarly, Stephen Innes, managing partner at SPI Asset Management, described the combination of higher oil prices, rising US yields and a stronger US dollar as a “wrecking ball” for Asian assets and currencies.

He noted that Asia is particularly exposed as it imports Brent-linked crude and Middle East blends rather than West Texas Intermediate (WTI).

Innes said that as the price spread between Brent and WTI widens amid geopolitical escalations, Asia “effectively pays a premium for instability, while the US sits partially insulated by its domestic pricing structure”.

“The same barrel shock hits Asia twice, once through higher outright prices, and again through the widening spread that amplifies the cost of imported energy,” Innes added.

Markets in Asia slid on Thursday. Singapore’s Straits Times Index closed 0.7 per cent lower, while Hong Kong’s Hang Seng Index shed 2 per cent.

South Korea’s Kospi declined 2.7 per cent, Japan’s Nikkei 225 retreated 3.4 per cent, and the FTSE Bursa Malaysia KLCI ended 0.5 per cent lower.  

At 6.15pm, gold retreated 2.4 per cent to US$4,703.26. This comes as safe-haven demand gave way to liquidation, noted Vishnu Varathan, head of macro research, Asia ex-Japan at Mizuho Securities (Singapore). 

Adjusting rate-cut expectations

In a move that had been widely anticipated, the Federal Open Market Committee voted 11-1 to keep the benchmark federal funds rate anchored in a range between 3.5 and 3.75 per cent.

But attention soon shifted to rallying energy prices, which clouded the inflation outlook and the case for policy easing later this year.

Jean Boivin, head of the BlackRock Investment Institute, remarked: “Even though the Fed policy rate guidance looks unchanged, we think it is clear that the case for further rate cuts has weakened considerably.”

He added: “How important the energy shock is to Fed policy will depend on how long energy prices stay high.”

As elevated energy costs fuel inflation fears, analysts have shifted the debate from when the Fed will cut rates to if it would do so at all.

Dr Boivin said: “We thought that the Fed could still get lucky in 2026 and get cover for further cuts. But the window for that scenario is closing.”

Similarly, deVere’s Green said: “September, or more likely October, is now the realistic opportunity for a rate cut, and even that is far from guaranteed.”

He added that investors must abandon the assumption that rate cuts are just around the corner: “The real story is not delayed cuts. It’s the possibility of no cuts for longer than markets are currently expecting.”

Despite this, Kerry Craig, global market strategist at JP Morgan Asset Management, maintained that the base case remains for a “good pace” of US and global growth. While this would support the outlook for risk assets, he acknowledged that “the tails to this view are now fatter”.

To manage these risks, he said maintaining a well-diversified portfolio in public and private markets is the “best strategy” to navigate uncertainty.

“With markets repricing across bonds and equities, this environment creates opportunities for active management to capitalise on price dislocations,” he said.