The past month has seen the fuel market move through three distinct phases: sharp relief as the initial Persian Gulf crisis eased, a period of relative stability as crude supplies recovered, and now a renewed increase in prices as geopolitical risk has returned. The latest move is material. Crude oil has risen by approximately US$6.50 per barrel as tensions in the Persian Gulf have intensified. That increase is flowing directly into petrol, while diesel has risen much more sharply because the crude move is being compounded by disruption to Russian diesel supply and renewed concern around the Strait of Hormuz. For Waikato businesses, particularly those in transport, farming, contracting, construction and distribution, diesel is once again the fuel carrying the greatest cost risk.
From crisis relief to renewed pressure
Earlier in the month, the market appeared to be moving steadily away from crisis conditions. Shipping through Hormuz had resumed, previously trapped crude was clearing, and the market had gained confidence that a wider breakdown in Gulf supply could be avoided. Crude prices had fallen sharply from their highs, and the focus shifted from whether fuel would be available to how quickly refinery output and product inventories could return to normal. This was particularly positive for New Zealand. Asia was better supplied than Europe and the Atlantic Basin, with visible availability from China, South Korea, India, Taiwan and Malaysia. Gasoline prices softened, diesel markets became more stable, and the world’s immediate product shortage appeared to be easing. New Zealand’s local pricing position also improved as the wide quality premium differences between importers began to close. That removed one of the significant distortions that had affected local competitiveness during the earlier crisis. However, the relief was always dependent on three conditions: Hormuz remaining open, Russian refinery output stabilising, and global product stocks rebuilding. Two of those conditions have now weakened.
Russia’s diesel shock
The most important new development is Russia’s decision to ban diesel exports until the end of July following extensive Ukrainian attacks on its refining system. Ukraine has reportedly struck all 11 of Russia’s largest refineries. Russian refinery downtime was estimated at approximately 4.3 million barrels per day in the week ending 10 July, while June diesel exports fell to around 500,000 barrels per day. That was half the level exported in January and approximately one-third below the same period last year. Further attacks have been reported against the TANECO, TAIF-NK, Saratov and Omsk refineries, increasing the risk that the outages persist rather than clear quickly. Russia is one of the world’s largest sources of internationally traded diesel. When Russian exports fall, European and Atlantic Basin buyers must compete for replacement fuel from the Middle East, India and Asia. Those are the same markets that influence the price of diesel into New Zealand. The impact is already clear. Singapore diesel spreads have widened sharply, European diesel imports are running below last year, and US ultra-low-sulphur diesel inventories have fallen, particularly on the Gulf Coast. In simple terms, crude oil has become more expensive, but the diesel produced from that crude has become considerably more valuable as well.
Renewed Persian Gulf risk
The second pressure is the deterioration in shipping conditions around the Strait of Hormuz. Earlier in July, vessel movements had recovered to approximately 47 to 48 crossings per day. Traffic then fell to 32 vessels on 10 July, 30 on 11 July and only 11 on 12 July, the lowest daily count since mid-June.
The US has reinstated restrictions on vessels entering and leaving Iranian ports, while Iran continues to assert control over parts of the shipping route used by commercial traffic. Iran has attacked vessels it says failed to follow its nominated route, while the US maintains that a southern corridor remains available for non-Iranian shipping. Risk has also spread beyond Hormuz. Iran’s Houthi allies in Yemen have resumed missile attacks on Saudi Arabia and threatened shipping through the Bab al-Mandab Strait at the southern entrance to the Red Sea. This route has become more important because Saudi Arabia can move crude by pipeline to Yanbu and export it through the Red Sea, avoiding Hormuz. It also carries Russian and Saudi crude and refined products towards India and Asia. Disruption there would threaten one of the principal alternatives the market has relied upon during the crisis. One positive development is the withdrawal of the proposed 20% charge on cargoes transiting Hormuz. This removed what could have become a very significant additional cost on Gulf fuel movements and has taken some heat out of the market. A renewed temporary safe-passage agreement remains the most credible route back towards lower prices. Iran needs export revenue, while the US has little interest in creating another major inflationary energy shock. Further escalation remains possible, but a temporary commercial arrangement still appears more likely than a sustained effort to stop all Gulf shipping.
Better prepared, but not immune
The situation is serious, but it is not yet a return to the unprecedented conditions seen earlier in the year. The global market has spent the past three months adapting. Alternative crude has been sourced, pipeline routes through Fujairah and Yanbu are being used more extensively, shipping routes have changed, and Asian refiners have diversified their supply. South Korea says it has secured sufficient crude for July and August. China has reopened refined-product exports for July, with approximately three million tonnes of petrol, diesel and jet fuel expected to be made available. Indian diesel exports have increased, South Korean refiners have offered additional August cargoes, and Malaysian production has also risen. These additional supplies give Asia considerably more resilience than it had during the initial disruption. The market is therefore pricing a genuine reduction in Russian diesel exports and renewed Gulf risk. It is not yet pricing an immediate physical shortage of fuel across Asia-Pacific.
Petrol and diesel are now behaving differently
Petrol prices are rising mainly because crude oil has increased. Additional supply from China, South Korea, Taiwan and Malaysia has pushed Singapore petrol premiums lower and prevented petrol from experiencing the same product-specific shortage as diesel. Diesel, by contrast, is carrying three separate pressures: higher crude oil, lower Russian exports and renewed Gulf disruption. That is why diesel has risen much faster and why the outlook for the two fuels is now materially different.
What this means for Waikato businesses
The broader market is still in a better position than it was three months ago, but the path back to lower prices has been interrupted. Diesel pricing is likely to remain elevated until either Russian refinery output recovers or shipping conditions in the Gulf improve. Petrol is better supplied but remains exposed to crude oil and any further escalation. For fuel-intensive businesses, the practical response is to remain disciplined around purchasing, route planning, vehicle use and fuel efficiency. Businesses should continue to compare prices using tools such as Gaspy, use the Waitomo App where appropriate, and consider the Waitomo Commercial Card or Kora to improve control over business fuel expenditure.
The market remains volatile, and conditions may change between writing and publication. The key indicators now are Hormuz vessel movements, Russian refinery availability, Chinese and other Asian exports, product inventories and the progress of any renewed US-Iran safe-passage agreement.
The immediate direction has turned higher, particularly for diesel. However, the market is not back in full crisis mode, and any meaningful improvement in Gulf shipping or Russian refinery output could still reduce prices relatively quickly.
