The past two weeks have been the most violent for shipping since the US and Israel went to war with Iran in February. Iran has stepped up attacks on commercial ships as it tries to reassert control over the Strait of Hormuz, where the US has been escorting more tankers through. Ships reporting attacks hit a record 12 in the week to 11 October, up from 10 the week before, and Iran is now also targeting vessels off Qatar and in the Gulf of Oman. Oil moving through the strait has slipped to 12.6 million barrels a day, down from 15 million at the end of September and around 17 million before the war. Crude has climbed back to around $US106 a barrel.
Prices are staying high for two reasons. First, moving oil has become slower and more expensive, with shipowners demanding record freight rates and higher insurance to sail through the Gulf. Second, the buffers that protected markets earlier in the war have run out. The International Energy Agency says strategic stockpiles are largely run down and refining capacity is stretched, making refined fuels like diesel even tighter than crude. Ahead of the US midterms, President Donald Trump struck a deal for Russian diesel that briefly cut US diesel futures by nearly 5%, but the supply equals only about 3% of global seaborne diesel trade, and prices remain more than 80% above prewar levels.
Australia is especially exposed. It imports almost 90% of its diesel and was the largest diesel importer globally last year, and diesel now costs more than $2.50 a litre at the pump. Airlines are passing on the cost. Virgin Australia has told travel agents it is raising airfares and expects its fuel bill to rise $49 million to $700 million in the first half of FY27 now that its hedging has expired. It is also cutting seats by 3%, while Qantas plans cuts of 3 to 5%. Virgin shares have fallen more than 20% this year.
Relief looks a long way off. Oxford Economics expects crude to stay above $US100 until mid next year, and the IEA warns diesel will stay tight even if ceasefires hold. For Australia, that means fuel costs flowing into transport, food and consumer goods, adding to inflation pressure on the Reserve Bank of Australia.
