Asian oil and gas markets have several buffers to withstand supply disruptions caused by a potential closure of the Strait of Hormuz, but those defenses could weaken if the conflict involving Iran drags on, according to a report by S&P Global Ratings.
In a prolonged conflict scenario, higher upstream earnings for regional oil and gas producers could be offset by rising costs in downstream operations such as refining and petrochemicals, the ratings agency said in a report titled “Prolonged Iran Conflict Can Breach Asian Oil And Gas Defenses.”
Strategic reserves offer short-term buffer
S&P Global Ratings said reserves would serve as the first line of defense against supply disruptions.
“Generally, reserves will be the first line of defense,” said Pauline Tang, a credit analyst at S&P Global Ratings. “If the Strait of Hormuz remains effectively closed, producers in Asia can use their crude inventories, which could fulfill their daily production for two weeks to a month.”
Strategic and commercial reserves vary widely across countries. India holds reserves equivalent to about 70-75 days of imports, China about 100-110 days, and Japan and South Korea more than 200 days.
Liquefied natural gas reserves typically provide shorter coverage, ranging from about three weeks in Japan to roughly a month in China and India. Australia, which relies on imported refined products, has refined fuel cover of just over 30 days.
About one-fifth of global crude oil and LNG flows pass through the Strait of Hormuz, with nearly 90% of crude shipments and roughly half of LNG supplies heading to Asia-Pacific markets.
Downstream margins under pressure
While upstream producers could benefit from higher energy prices, S&P Global Ratings said integrated oil and gas companies in Asia may face pressure in downstream businesses.
“Costs will rise, with margins squeezed by downstream operations,” said Charles Chang, Greater China country lead for corporates at S&P Global Ratings. “If supply disruptions persist, oil and gas firms may need to re-route shipping, source from elsewhere, or increase domestic production. These measures will incur additional outlays and raise unit costs.”
Higher feedstock prices could reduce refining margins and petrochemical spreads, particularly in countries that depend heavily on imported feedstock such as Japan, South Korea and India.
If supply constraints worsen, downstream producers could cut operating rates by 5% to 30%, which would reduce revenues and increase costs further, S&P Global Ratings said.
Uncertainty over reserves and market outlook
It remains unclear when governments would tap strategic reserves, according to the report.
Given limited stockpiles and rising prices, conditions may need to deteriorate significantly before authorities decide to release reserves.
The duration of the conflict remains a key uncertainty for global energy markets. S&P Global Ratings recently revised its 2026 assumptions for Brent and West Texas Intermediate oil prices upward by $5, to $65 and $60 per barrel respectively.
The report examined vulnerabilities and defenses across major regional markets including China, Japan, South Korea, Singapore, Indonesia, Thailand, Malaysia, India and Australia.
S&P Global Ratings said the eventual normalization of supply chains could also create challenges, as oil and gas markets may face delays linked to refilling reserves and repairing infrastructure once the conflict subsides.
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