Australian businesses and consumers may need to be prepared for potential fuel price rises after the US entered the Israel-Iran conflict over the weekend by striking Iran’s nuclear facilities. The Brent international benchmark futures price surged to a five-month high of US$81.40 a barrel. In fact, crude oil prices have risen $11 US a barrel or nearly 16% since Israel first struck Iran on 13 June. The other widely used international benchmark price, West Texas Intermediate, has also experienced a comparable price rise.
The conflict has now entered a more dangerous phase with Iran vowing to retaliate and US President Trump pointing to the possibility of further attacks if Iran does not make peace. In this backdrop, the risk of further price gains and disruptions to oil supply remain high.
Oil supply and supply chains
Iran produces around 3.5 million barrels per day and exports approximately 2 million barrels per day. There is currently spare capacity of around 6 million barrels per day available within the Organisation of Petroleum Exporting Countries (OPEC), which means disruptions to Iran’s oil supplies may be made up relatively quickly.
However, the bigger concern for commodity markets is what form Iran’s retaliation will take. One of the biggest concerns remain potential blockages or disruptions to the Strait of Hormuz. One third of the world’s seaborne oil supplies (or 20% of petroleum liquids consumption) passes through this narrow waterway.
It’s possible that Iran may not succeed in fully shutting off this Strait given the presence of the US Navy’s Fifth Fleet in Bahrain, but Iran may target ships passing through the strait. In this way, supplies through this channel could still be heavily disrupted.
While Australia does not directly import its supplies via this channel, oil markets are highly interconnected and global crude prices are highly correlated with Australian fuel prices (see below left chart). High oil prices would raise fuel costs for shipping companies and higher freight charges. Disruptions to global shipping routes could cause delays and create supply-chain bottlenecks, which may impact the timely delivery of goods to and from countries including Australia.
Retaliation could also involve Iran attacking American and Israeli assets in the Middle East or attacking other Arab countries that are allies of the US.
Petrol prices
Higher oil prices, if sustained, are likely to spread to the price of petrol at the bowser. Australia imports from the Asia-Pacific region, but the world price of crude oil is highly correlated with the national average price of petrol (see bottom left chart). If prices remain at this higher level for an extended time, Australian motorists can expect to pay more for fuel. A rough rule of thumb is for every one US dollar increase in the world price of crude, there’s an increase of one US cent at the petrol pump, assuming steady exchange rates.
A price rise at the bowser leaves consumers with less disposable income to spend elsewhere in the economy, which can add to the sluggish trends prevalent in household spending.
In our opinion, the combination of soft economic activity and heightened uncertainty from geopolitical and trade tariffs strengthens the case for a July rate cut.
Impact on businesses and industries
Oil is a key input in the transportation, manufacturing, chemicals and agriculture industries. Unless businesses can pass on these additional costs to the consumer, business margins and earnings will be impacted. Economic activity is soft in Australia, especially private demand, so it’s questionable how much could be passed on to the end consumer.
For businesses, the latest developments add to uncertainty. Uncertainty was already heightened from US tariff policy. The combination of trade and geopolitical tensions means ongoing downside risk to global growth. The International Monetary Fund (IMF) downgraded global growth in January. It expects the world economy to grow by 2.8% this year, down from the previous estimate of 3.3%. The new estimate is well below the long-run average. The world’s largest net crude oil importers include China and Japan.
Impact on equities
Energy stocks and defensive stocks may benefit if the conflict continues to escalate and becomes protracted, but growth stocks – especially those more sensitive to retail and energy costs – are likely to be more vulnerable.
The information in this article is general in nature, intended for informational purposes only and does not constitute financial, investment, legal or professional advice; readers should seek guidance from qualified professionals before making decisions based on its content.
