Asian markets started the week on edge as the US–Iran conflict triggered sharp swings in oil prices. Brent crude surged past US$100 per barrel on Monday after renewed strikes on energy infrastructure and continued disruptions to tanker movements through the Strait of Hormuz, a narrow passageway that handles nearly 20 percent of global oil trade.

However, oil prices eased on Tuesday following US President Trump’s remarks that the war could end soon, retreating to around US$90 per barrel. The pullback offered some relief to Asian markets on Tuesday, with South Korea’s KOSPI up 5 percent and Japan’s Nikkei rising 3 percent, while major indices in Singapore, Hong Kong and Taiwan gained around 2 percent.

Asia’s reliance on Middle Eastern oil

Asia’s sensitivity to oil price volatility reflects its heavy dependence on Middle Eastern energy. The region sources about 60 percent of its oil from Gulf states, making any sustained disruption to the Strait of Hormuz a significant economic risk.

This exposure helps explain Asian market’s sharp sell-off on Monday, as investors reacted to fears of prolonged supply constraints. While Tuesday’s rebound came as oil prices eased, the underlying vulnerability remains a key risk should prices spike again.

Uneven impact on Asian economies

Given this high level of dependence, the next question is how a sustained oil shock could affect individual Asian economies. Most Asian countries hold at least a month of crude inventory, which provides a useful buffer against sudden price spikes. Even so, the impact of sharply higher oil prices varies widely across the region.

Thailand is among the most affected, as higher oil costs tend to push up living expenses more quickly and weigh more noticeably on growth. South Korea also sees a relatively larger inflation impact, given its energy‑intensive industrial base. In contrast, Japan and Singapore are expected to see only modest increases in costs and a mild impact on growth, helped by stronger policy buffers and slower inflation pass‑through.

These differences highlight the uneven effects of an oil price shock, even among economies with high levels of energy import dependence.

Fig 1: Economies with high exposure to Middle Eastern oil

Source: Morgan Stanley Research, BoFA Research, UOBAM, Bloomberg, as of 6 March 2026

Asian markets still supported

Despite the volatility, we think Asian markets continue to be supported by a healthy earnings outlook. Corporate profits in 2026 are still expected to grow above trend, helping to buffer against oil price headwinds.

A key source of resilience is the region’s market composition. Many Asian indices are weighted towards sectors like financials, technology, telcos, real estate, pharmaceuticals and retail—areas that are less sensitive to swings in oil prices. As a result, the overall drag on profits from higher oil prices is likely to be contained.

Based on a sensitivity analysis, a rise of US$20 per barrel in oil prices for a one-month duration is projected to dent Asia Pacific earnings by an average of 2 percent in 2026¹ assuming full pass through of higher costs. We see near-term pressure on earnings but the impact is likely manageable given the region’s still-solid growth expectations.

Beyond earnings resilience, structural drivers continue to support the medium‑ to long‑term outlook. We believe the ongoing AI hardware and semiconductor cycle remains a significant tailwind, while several economies retain fiscal flexibility to cushion against short‑term shocks. Together, these factors help underpin the longer-term investment case for Asia, even as oil prices remain volatile.

How we are positioned

We are cautious on Asia in the near term, notwithstanding our constructive view on Asian markets over the medium to long term, supported by attractive valuations and favourable structural drivers.

In positioning, we remain engaged but mindful of near‑term risks. Tactically, we have raised materials and energy to their maximum overweight to reflect the current commodity backdrop. At the same time, we maintain a balanced exposure across cyclicals—including industrials and Taiwan technology names linked to the AI supply chain—and defensives such as consumer staples, to help cushion portfolios against volatility.

Geopolitical risks to watch

While Asia’s earnings resilience provides an anchor, several geopolitical risks could still fuel market volatility. These include Qatar halting gas production as storage facilities fill, Kuwait potentially being forced to follow suit, and the effective closure of the Strait of Hormuz, despite the US saying it is prepared to escort tankers through the strait when necessary. Each of these developments increases the risk of further supply disruptions and keeps oil prices susceptible to renewed spikes.

Against this backdrop, we outline three broad scenarios. The base case is that hostilities ease within the next two to three weeks, allowing markets to stabilise as shipping flows gradually resume. A more optimistic best case involves political transition in Iran, which could lead to a healthier long term regional dynamic and lower market risk premiums. However, the downside scenario is that the conflict becomes more prolonged, with Israel continuing extensive operations and the US drawn into an extended engagement.

For Asia, these risks matter because any prolonged disruption in shipping or production would delay the normalisation of energy prices and extend pressure on inflation and growth across the region.

Could the Iran war end soon?

Building on the scenarios outlined above, the key issue now is whether the conflict is likely to ease in the near term.

President Trump’s latest comments hint at a possible desire to wind down hostilities. The war is increasingly unpopular in the US, and a prolonged period of high oil prices risks reviving inflation. This could weigh on the Republicans heading into the US mid-term elections in November, a factor that may incentivise Trump to reach an endgame.

We therefore continue to believe that the conflict is unlikely to be prolonged, which would allow shipping routes to normalise. Under this scenario, Asian markets should stabilise, supported by firm earnings fundamentals and a resilient sector mix.

That said, the risk of further escalation cannot be ruled out. Continued Israeli strikes or Iranian retaliation could keep tanker traffic constrained and oil prices elevated for longer. Should this occur, the pressure on inflation and growth across Asia would persist. Against this backdrop, maintaining prudent hedges and disciplined risk management remains essential.

¹Source: Goldman Sachs Research, as of 3 March 2026