Australian fuel market update - 8 July

In welcome news we have seen significant reductions in the international price of diesel in the last week. The Mean of Platts Singapore (MOPS) index, which is the price index typically followed by local fuel importers, is now at US$137 per barrel for diesel. In Australian dollar terms that is A$202 per barrel, which is the lowest mark since mid-April and is a 24% reduction on the recent peak on 21 June (see figure 1). In broad terms, diesel bowser prices typically follow the MOPS trend approximately a week in arrears, and jet fuel prices approximately a month in arrears. Assuming that there are no major and unforeseen events in the short-term, we expect a meaningful easing of fuel prices in coming weeks.

Figure 1: Mean of Platts Singapore (MOPS) prices for diesel since January 2022 in Australian dollars (source: SP Global).

Oil prices

The reduction in MOPS has been driven by a softening in the oil market, which in June registered its first monthly decline in prices since November last year. Oil (Brent) is now trading around the US$100-105 mark.

Prices have been impacted by fears of a potential recession, and amplified as central banks around the globe increase interest rates. Demand for oil in recent weeks has fallen short of expectations, in a sign that high fuel prices and constrained demand in China due to lockdowns are now impacting the market. Oil reserves in the US unexpectedly grew by 8.2 million barrels in the week to 1 July.

Nonetheless, oil supply remains tight. The political situation in Libya may lead to a halving of their current production, and Kazakhstan production has been left in limbo as Russia ordered a halt to transport through the Caspian oil pipeline (though oil currently continues to flow).

Analyst expectations vary significantly on the outlook for oil prices. Forecasts vary as widely as US$85 per barrel by the end of the year, to over US$120. Given the continued and structural lack of supply, it will require a deep global recession to dampen demand enough to significantly impact oil prices. According to World Bank research, in three of the last four global recessions oil demand fell only 0-3% (in 1975, 1991, and 2009). Only in the 1982 recession did demand drop significantly at nearly 8%.

Refining capacity

In previous market updates I have described a lack of refining capacity as one of the key drivers of high fuel prices around the globe. Refineries outside of China are largely running at close to full utilisation, while Chinese refineries, which have access to cheap Russian crude oil, have received their latest round of export quotas. These quotas year-to-date are ~39% below 2021 figures according to Reuters estimates. Without a change to these export settings, we do not expect refining bottlenecks for the broader global market to ease.

In summary, we see good news on the short-term horizon for fuel prices to come down. Structural supply issues remain in both the oil and refining markets, and so longer-term and significant fuel price declines are likely only through demand destruction and recession. That is not a great outcome for anyone either, so hopefully we wind up somewhere in the middle.

As always, please contact your IOR or Strike Fuels account manager should you have any questions about the implications for your business. If you're not a customer yet, contact us at 1300 457 467 or sales@ior.com.au to find out what we can do to support your business.