Middle East conflict: Market commentary (week of March 9)

14:30 CET

Multi-Asset: An increasing dilemma for the US administration

By Peter van der Welle, Multi-Asset Strategist

It’s becoming more difficult for the US administration to square the circle regarding the conflict in the Middle East. On the one hand the administration has to cater to the hawks who are seizing geopolitical momentum and want to achieve Iranian regime change. At the same time financial markets and US voters need to remain confident that the conflict will be of limited duration.

Tehran in charge of Strait of Hormuz
The initial oil spike toward USD 120 per barrel was an early warning signal and the subsequent pullback, spurred by the announcement of a historical large release of strategic oil reserves, shouldn’t be mistaken for resolution. Iran has little incentive to declare this conflict over, and only Tehran, not Washington, can reopen the Strait of Hormuz. While US energy secretary Chris Wright stated that US Navy escorts of oil tankers through the Strait will happen relatively soon, “it can’t happen now.”* That asymmetry matters.

The math doesn’t add up
Oil futures curves suggest the market expects the conflict to be short. A longer-than-expected closure of the Strait of Hormuz will see oil markets demand higher risk premiums, even in the wake of 400 million barrels to be released by IEA member states from reserves. The math simply doesn’t add up. The freeing up of 2 million barrels per day from strategic reserves (an optimistic estimate) only offsets around 20% of lost oil barrels through the effective closure of Strait of Hormuz. Re-routing oil flows through the East-West pipeline to the Saudi Port of Yanbu helps in coming weeks but doesn’t fully offset lost barrels either.

When supply is inelastic, demand destruction has to do the heavy lifting
When supply is not able to accommodate, demand has to react to restore equilibrium. Demand destruction incentivized by higher oil prices is already underway. One indicator for demand destruction is to look at the share US households devote to energy expenditures as a percentage of GDP. When these expenditures are below trend, it is indicative of voluntary rationing. We find that rationing typically occurs with gasoline prices at the pump exceeding USD 3 per gallon (see the below chart). Today’s prices at US pumps have jumped to USD 3.5. Thus, with the US midterm elections inching closer, voters have just started to feel the pinch of the US military intervention, aggravating an already lingering affordability crisis among low income households.

Gasoline price in USD per gallon vs Household energy consumption as % of GDP (detrended)
Source: LSEG Datastream, Robeco

* U.S. Navy Won’t Be Ready To Escort Tankers Through Hormuz For Weeks (Updated)

13:00 CET

Emerging Market Debt: Selectively adding risk

By Richard Briggs (Portfolio Manager) and Meena Santosh (Client Portfolio Manager)

The sharp rise in oil prices following the escalation of conflict in the Middle East has continued to weigh on EM local markets, though FX markets have been more resilient than in prior periods of volatility. The International Energy Agency’s release of roughly 400 million barrels from strategic reserves helped ease some of the immediate pressure, but energy prices remain elevated. Higher energy costs have been particularly challenging for oil-importing countries, triggering an initial sell-off in EM local debt, although roughly half of that move has since reversed as markets stabilized.

The most affected regions have been energy-importing economies, particularly in Central and Eastern Europe (CEE). For these countries, the greater challenge is gas rather than oil, as it is significantly harder to substitute if the shock persists. Gas is harder to substitute, and supply constraints – especially around Qatari LNG deliveries – mean Asia could face shortages if the Strait remains effectively blocked, and CEE by extension via a search for spot gas exports. Latin America appears somewhat more insulated given the region’s stronger energy balances. Looking ahead, we are closely monitoring the sharp decline in shipping traffic through the Strait of Hormuz and the broader inflationary risks associated with sustained higher oil prices.

From a portfolio perspective, we initially moved long USD as the conflict escalated and global risk aversion increased. As conditions began to stabilize, we reversed that positioning and selectively added risk, buying into some of the hardest-hit markets. We have since returned to a long exposure to Egypt local debt after a sharp sell-off in spot FX, though in smaller size. We also added Turkish rates, where heightened volatility has created more attractive entry points. We have begun to add back to CEE rates too where the sell-off has been severe.

In FX, we remain constructive on EM currencies, focusing on higher-beta names and commodity exporters. While these currencies sold off during the initial shock, they should remain relatively resilient given their status as net energy exporters – similar to the pattern observed during the 2022 gas crisis. By contrast, we remain cautious on Asian FX, particularly the Korean won (KRW) and Thai baht (THB), given their sensitivity to global growth and exposure to higher gas prices. Overall, our tactical and selective positioning has supported portfolio resilience through the volatility.

Within hard currency, we reduced our defensive exposure to the Middle East by closing our Saudi Arabia (KSA) five-year protection, which had been in place to hedge against a potential widening in Saudi credit spreads, though we remain underweight the region. As the conflict escalated and oil prices surged, the hedge performed well, allowing us to take profit and scale back the position. Later, as a more coordinated global policy response emerged – including strategic oil releases and early signs of diplomatic de-escalation – we added risk back into the portfolio. Key hard-currency exposures currently include Argentina, Colombia, Ecuador, Egypt, Ghana, Mexico (Pemex), and Romania. These positions are supported by favorable commodity dynamics in Latin America and selective fundamental resilience across several markets.

15:30 CET

Multi-Asset: Winners and losers in the energy shock

By Peter van der Welle, Multi-Asset Strategist

The appointment of Khamenei’s son as the new Iranian leader and the prospect of a prolonged conflict delivered a major shift for oil markets. The 32% jump in oil prices so far since the Middle East turmoil erupted also exposes the fault lines in the global energy system. Oil prices typically spike as market participants demand a very large premium to insure against unexpected declines in oil spare capacity. Selmi et al. (2020* ) find that the use of spare capacity reduces the initial reaction of oil prices only moderately. The oil market wants to have more certainty that the Iranian conflict will remain limited in scope (no further attacks of Iranian proxies on refineries) and duration (weeks). However, as things stand, the market may not get what it wants even as talks about a release of strategic reserves among G10 members are underway.

Beyond import reliance: broader measures of energy vulnerability
As oil prices likely remain elevated near term, net energy exporters like the US and Norway have seen their currencies appreciate while currencies of net energy importers like Korea and the Eurozone remain under pressure. Net energy import dependency remains a useful compass to assess the fault lines. Looking at net energy imports as a percentage of domestic energy use, Japan (87%), the Netherlands (87%), Korea (85%), Italy (80%) and Spain (77%) sit at the more exposed end of the spectrum, while the US (9%), Brazil (14%), Australia (214%) and especially Norway (704%) remain structurally shielded.

Substantial cross-country variation in energy import dependencies

Source: LSEG Datastream, Robeco, March 2025.

Yet, unconditional import reliance does not paint the full picture of cross-regional dispersion in energy dependency. Financial markets now also have to scrutinize the energy intensity of economies, the degree of energy import substitutability (via renewables), oil subsidy levels and the pace of inflation pass-through from energy import prices to end users to assess the implications for fiscal as well as monetary policy.

Renewable energy: buffer or bottleneck?
Economies with high renewable energy shares should, in theory, buffer external oil shocks. Renewable energy shares in major European economies have risen considerably in recent years (Germany now services around 25% of its energy use from renewables). Yet, renewable output only offsets fossil demand if grids can absorb and distribute it. Grid congestion and curtailment continue to inhibit substitution, forcing reliance on fossil backup when renewable generation peaks cannot be utilized. The result is a lingering vulnerability despite ambitious renewable build-out.

Regional winners and losers in the energy shock
Regionally, the asymmetry in relative terms of trade is clear. Asia is most directly at risk, as at the time of writing the Strait of Hormuz remains virtually closed and 83% of oil transiting the Strait of Hormuz is flowing toward Asian buyers. Europe comes next, constrained by limited substitutability and swift pass-through rates to end users. Australia, Norway and the US remain relative winners, supported by domestic production, low energy intensity (the US manufacturing share of GDP has steadily declined in recent decades), and the potential for shale drillers’ responsiveness if higher prices persist.

*Selmi, R., Bouoiyour, J., & Miftah, A. (2020). Oil price jumps and the uncertainty of oil supplies in a geopolitical perspective: The role of OPEC’s spare capacity. International Economics, 164, 18–35. https://doi.org/10.1016/j.inteco.2020.06.004