Morgan Stanley's Chief China Economist Xing Ziqiang recently stated that the global markets are undergoing a significant stress test triggered by geopolitical conflicts in the Middle East. Brent crude prices surged past $110 per barrel, marking the largest increase in recent years, due to escalating tensions between the US and Iran and the near closure of the Strait of Hormuz.
Asian economies, including India, South Korea, and the Taiwan region of China, which rely heavily on imported energy, have been noticeably impacted. Morgan Stanley's oil strategists analyzed the situation across three dimensions of the crude oil supply chain: upstream production, midstream transportation, and downstream pricing.
Upstream, several countries are experiencing substantial disruptions. Iraq has announced significant production cuts, Kuwait has reduced refinery operations, and Qatar has warned of potential impacts on its output. Midstream, shipping fleets are rerouting due to extremely high risk premiums, causing a sharp spike in global freight rates over the past week. Downstream, prices have risen sharply. Many Asian refineries, heavily dependent on Middle Eastern crude, are slowing operations due to tightening supply, with aviation fuel becoming a particular pressure point.
Regarding future oil price trends, Morgan Stanley's research team outlined three scenarios. In the first scenario, if tensions ease within weeks and shipping traffic fully resumes, Brent crude could fall back to $65–70 per barrel. The second scenario involves prolonged disruptions, with only partial recovery in shipping flows over several weeks, keeping Brent crude around $90 per barrel in the first half of the year. The third and worst-case scenario involves a prolonged closure of the Strait of Hormuz, pushing Brent crude to $120–130 per barrel, as supply constraints would force demand destruction to rebalance the market.
Xing emphasized that high oil prices, particularly if they approach $120 per barrel, could become a sensitive political issue in the US midterm elections this year. Elevated gasoline prices are a key concern for American voters, potentially forcing the Federal Reserve into a dilemma between combating inflation and supporting economic growth.
To gauge which scenario is most likely, Morgan Stanley's geopolitical team suggested monitoring three signals: the clarity of US strategic objectives, changes in shipping traffic through the Strait of Hormuz, and the frequency of military and proxy activities. A prolonged spike in oil prices could add 0.3 percentage points to US inflation for every 10% increase, further complicating the Fed's policy decisions.
In Asia, India is the most affected, with liquefied natural gas (LNG) inventories lasting only five to six days, followed by Thailand, the Taiwan region of China, and South Korea. Supply chain vulnerabilities have contributed to significant market volatility in these regions.
Shifting focus to China, Xing described the recent Two Sessions meetings as moderate and technology-focused. The government set a growth target of 4.5–5.0%, with fiscal deficit rates remaining stable. Technology spending saw the highest growth among all expenditures, emphasizing emerging industries, future technologies, and green transformation. However, achieving reflation and breaking deflationary pressures remains challenging.
At Morgan Stanley's flagship TMT investment summit in San Francisco, discussions highlighted expectations for a nonlinear leap in AI development. Infrastructure areas such as storage, networking, and semiconductor equipment remain attractive to investors. In contrast, large internet companies are viewed less favorably due to heavy cash flow investments in AI computing, potentially straining their financial flexibility. While China shows progress in embodied AI and humanoid robots, US investors remain cautious about scalability and data availability.