The incident sent Brent futures prices racing above US$70 per barrel briefly, before a de-escalation of the crisis pulled prices back to the mid-$60s per barrel. S&P Global Platts Analytics expects Brent upside to be capped in the high-$60s per barrel range. While geopolitical risks have deflated, S&P Global Platts Analytics has warned that further retaliation is still possible.

“Iran’s relatively restrained initial reaction to US drone strikes [has] cooled the temperature for now, but we believe its retaliation is far from complete, and will revert to more typical indirect tactics in the months ahead. Gulf oil infrastructure and transit remain very much at risk,” Paul Sheldon, chief political adviser at Platts Analytics said. Sheldon, in his latest Political Risk Special Report, cited Iranian retaliation as well as a political and security vacuum in Iraq as the top bullish oil market risks for this year.

Asia is particularly sensitive to this risk given its heavy reliance on the Middle East for crude oil supply. More importantly, this supply travels through the Strait of Hormuz — a narrow strait between the Persian Gulf and the Gulf of Oman, which provides the only passage from the Persian Gulf to the open ocean. Around 21 million barrels per day (bpd) of crude oil transits through this strait. Iran in the past has threatened to block this strategically important choke point.

Another risk factor looming over Asia is the fragility of Iraqi supplies with the country almost becoming a proxy battleground in the US-Iran tensions. Iraq features as one of the top five oil suppliers to most of Asia.

“Recent events have shown that Iraq is a potentially vulnerable supplier, just as its strategic importance has grown,” the International Energy Agency said in its monthly report. “Today, both China and India receive about 1 million bpd of oil from Iraq and another 1 million bpd moves to various European countries. In India’s case, around 20 percent of its crude imports come from Iraq.”

Iraq relies on foreign companies, workers and funding to operate its complex oil fields and a mass exodus of workers, should the security situation there deteriorate, poses a significant risk to supply. ExxonMobil’s West Qurna 1 project is one of three giant oil fields in Basrah being developed by foreign oil companies. BP’s Rumaila field and Eni’s Zubair project are the other two while Russia’s Lukoil is developing the West Qurna 2 project.

But Asian refiners have so far maintained calm, largely comforted by the fact that their efforts to diversify supply will hold them in good stead. The Middle East has always been a geopolitical hotspot and supply diversification has been a cornerstone of every Asian countries’ energy security strategy.

Japan is the only country that has seen its dependence on Middle East oil grow to almost 90 percent in the last five years. South Korea has lowered it to 70 percent from 82 percent, India to 61 percent from 65 percent, China to 44 percent from 51 percent, and Southeast Asia to 53 percent from 61 percent.

Several Asian importers Platts spoke with said they were poised to venture into Latin America, as they prepare a contingency plan to ensure adequate supply of crude feedstocks. Crude from Brazil, Mexico and Colombia could all make up for a supply shortfall from Iraq, they said.

China imported 11.44 million mt of crude oil from Colombia over January-November 2019, up by about 21 percent from a year ago, and is likely to continue to embrace more medium and heavy Brazilian crude grades to counter any Middle Eastern supply risk.

In South Korea, industry sources picked Mexico’s heavy sour Maya crude as one of the top refinery feedstock choices to fill any possible Basrah crude supply gap in the near to medium term future.

Indian refiners were not too worried either, saying rising oil prices as a result of the tensions was a bigger cause for concern given the fragile state of the economy. Another mitigating factor for Asia is the new sources of crude supply that have hit the market and the lower demand growth due to softer economic conditions.

Brazil, Norway, Canada and Guyana are all expected to see strong crude production growth in 2020 and will be important suppliers to Asia. Total crude production growth from these four countries is estimated at 772,000 b/d, according to Platts Analytics.

China has already boosted Norwegian oil imports and is likely to add Norway to the list of its regular crude oil suppliers in 2020, with the country’s independent refiners especially finding North Sea’s new Johan Sverdrup crude attractive for its competitive price and familiar specification.

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