Orient Securities: If high oil prices persist and lead to a global recession, China and the United States may benefit more than other regions.

(Source: Caixin)

     The Chinese yuan is expected to gain a higher share in Middle Eastern oil settlement; however, expectations for the pace of "de-dollarization" should not be overly optimistic. In the short term, the higher oil-price center of gravity and the ebb and flow of global monetary policy easing expectations may both continue to keep the dollar strong.            

April 6, a research report from Orient Securities pointed out that, when looking at the similarities and differences between the US-Iran situation and the Suez Canal crisis, in terms of similarities, this US-Iran conflict is highly likely to end in a way similar to the Suez Canal crisis—that is, the empire cannot control the energy chokepoint, which then becomes a catalyst for accelerating changes in political and economic trends; while in terms of differences, at the time, the UK faced two even more unfavorable situations:

First, after World War II, there were already two parallel oil settlement systems in the world—“dollar oil” and “pound oil”—and either side had the ability to replace the other. The UK relied on the “Imperial Preference System” established in the 1930s and later evolved into the “pound area.” It mainly imported oil from the Middle East using pounds, while the United States mainly imported oil from Latin America using dollars. Other industrial countries had both.

Second, and more importantly, the UK was a major oil importer. The most deadly real issue for the UK caused by the Suez Canal blockade was that it could not obtain “pound oil” from the Middle East, so it could only buy the more expensive “dollar oil” by consuming foreign exchange reserves and dollars. Therefore, after the canal was blocked, the pound was immediately sold off on a large scale by international institutions, leading to a sharp depreciation of the pound.

Compared with the two points above, the United States’ current situation is clearly much better, and this is also the main reason why, after the conflict, the dollar is completely different from the British pound back then. On one hand, although the oil-dollar system has shown cracks, the share of dollar settlement in global oil trade is still very high, and there is no strong rival. On the other hand, as the United States is a net oil exporter, it imports very little oil from the Middle East itself, and the rise in oil prices further increases the amount of dollars needed to purchase oil.

Based on the factors above, we believe that in the long run, the US-Iran conflict is a landmark event symbolizing the decline of dollar hegemony, and the Chinese yuan is expected to gain a higher share in Middle Eastern oil settlement; however, expectations for the pace of “de-dollarization” should not be overly optimistic. In the short term, the higher oil-price center of gravity and the ebb and flow of global monetary policy easing expectations may both continue to keep the dollar strong.

If, in the future, global recession trades emerge due to high oil prices continuing, then the market may price more from the perspective of energy resilience. As typical representatives of new and old energy resilience, China and the United States may benefit more than other non-US markets. The volatility of global risk assets in March was mostly due to risk appetite and liquidity shocks brought about by the conflict; once the conflict eases temporarily, the market will reassess the impact of high oil prices from a fundamental perspective. As China, the country with the most successful energy transition, and the United States, the country with the strongest traditional energy resilience, both may benefit from this.

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