Diesel Australia’s big worry, says CBA economist Vivek Dhar

The disruption of shipping through the Strait of Hormuz is already the largest supply shocks the oil market has experienced, CommBank’s Head of Commodities and Sustainable Economics Vivek Dhar said on the latest episode of CommBank View: Economics & Markets.

“If you look at all the major crises in the world, the Suez Canal, the oil embargo in 1973, even the Iranian Revolution in 1979, this is by far the biggest disruption we’ve seen [in oil markets],” Dhar says.

And while rising crude prices have captured global attention, Dhar says refined fuel, particularly diesel, is the bigger concern for economies.

“The product everyone is worried about is diesel, and for good reason,” he says. Diesel is used extensively in trucking, farming and mining in Australia. 

Australia could be more exposed than some other advanced economies because of relatively limited fuel stockpiles.

“The concern is that we roughly have 30 days of stockpiles.” Other advanced economies like Japan, South Korea, Taiwan and the US have significantly more days of stockpiles than Australia.

Conflict, disruption may drag on

Speaking on the podcast Dhar said after accounting for alternative export routes, around 14–16 per cent of global oil supply is still being disrupted. 

CommBank’s assessment of the conflict has shifted as the situation has evolved, he says with the disruption now expected to last longer than initially thought.

“Initially we went to thinking this would last weeks, to now thinking this will last months,” Dhar says. 

Prolonged disruption could push oil prices high enough to reduce demand in some economies.

“We think Brent prices of US$120 to US$150 a barrel is certainly the range in which we’re going to see demand destruction come through emerging markets.” 

LNG and electricity risks also rising

Dhar says the conflict is not only affecting oil markets. 

Asian LNG spot prices have already jumped sharply, creating potential flow-on risks for gas and electricity prices on Australia’s east coast.

“Spot prices for Asian LNG are now around US$20 per Million British Thermal Units (MMBtu,) just under double where they were before this war in the Middle East,” he says. 

That matters because east coast gas prices often track LNG netback pricing, which can influence electricity prices. This becomes a more pronounced risk during the Australian winter season – especially in the southern states. Higher east-coast gas and electricity prices are other inflation vectors to watch in Australia on top of higher fuel prices.