The world has forgotten what the Middle East looked like before this war began. Nearly three years of conflict since the Israeli attack in October 2023 have completely transformed the region, and the effects are still being felt today.
Regional Alliances Are Completely Changing
A recent study found that half of the 45 major diplomatic relationships in the region have changed dynamically since the war began. Nine alliances have strengthened, ten have weakened, and only nine neutral relationships have remained unchanged.
Saudi Arabia and the UAE, for example, were once on the same page, but are now increasingly at odds. The UAE chose to stay close to Israel and share intelligence during the Iran war, while Saudi Arabia chose to be diplomatic and avoid further escalation.
This division is not just a political issue. Last May, the UAE withdrew from OPEC after almost six decades of membership, a move that surprised Saudi Arabia itself at a time when the energy crisis was worsening.
The Strait of Hormuz, the Lifeblood of the Economy That Continues to Be Gamble
This is the most worrying part of the world's financial markets. Brent crude prices soared to $126.41 a barrel in April, up from just $72.48 a day before the war began. Although they have now fallen back below $80, shipping insurance costs are expected to remain high as the risk of renewed sanctions looms.
Iran's attack on Qatar's LNG facilities in March knocked out almost 17% of the country's export capacity, damage that could take years to repair. This has had a lasting impact on European energy buyers and has also depressed global fertilizer and petrochemical costs.
Gulf oil-producing countries themselves have been forced to cut output by up to 10 million barrels a day at one point, about 10% of the world's oil supply. The UAE is currently building new infrastructure outside the Strait of Hormuz to reduce long-term reliance on the route.
The Impact on the Market & Our Ringgit
When the crucial Strait of Hormuz continues to be a political gamble, global energy costs will struggle to stabilize completely, even as oil prices have receded from their recent highs.
Such long-term uncertainty typically maintains a “risk-off” sentiment in the forex market, with the dollar and other safe-haven assets favored over energy-importing currencies such as the ringgit.
The impact of disruptions in the supply of fertilizers and consumer goods could also trigger prolonged inflationary pressures in many countries, with spillover effects on Malaysia’s own import costs.
Key Takeaways
Nearly three years of war have completely upended regional alliances in the Middle East, with half of the key diplomatic relationships changing dynamics.
Brent oil prices once soared to USD126.41 a barrel at the height of the crisis, from USD72.48 before the war began.
Damage to Qatar’s LNG facilities and disruptions to Gulf oil production of up to 10% of world supply have had a long-term impact on global energy costs.
The UAE is building an alternative route outside the Strait of Hormuz to reduce long-term reliance on the route.
Continued uncertainty in Hormuz maintains a risk-off sentiment in the forex market, with the risk of import cost pressures also being felt in countries such as Malaysia.
As long as the Strait of Hormuz remains a political gamble, the financial world is expected to continue living in the shadow of uncertainty, as the wounds in this region do not appear to be healing anytime soon.
