Middle East Crisis Doubles Reserve Bank Rate Hike Odds Amid Surging Fuel Prices

The likelihood of a Reserve Bank interest rate hike has doubled, according to market forecasts, as the escalating Middle East crisis once again drives fuel prices higher amid dwindling global oil reserves.

The total breakdown in the fragile ceasefire between the US and Iran has sent the international Brent crude benchmark surging by 23% over the past two weeks and back within reach of $US90 a barrel.

As experts warn the global energy market is now at a “critical juncture”, Australian motorists are once again faced with climbing fuel costs, albeit without the panicked buying and accompanying shortages that accompanied the start of the US-Israel war on Iran in early March.

Diesel, which has consistently been most exposed to the global disruptions, has jumped by 40 cents in July to about $2.10 a litre in the major cities on the east coast, according to Motormouth.

The removal of some of the federal government’s fuel excise relief from the start of this month has also contributed to higher costs, with unleaded petrol up by 25 cents to about $1.75.

Amid already depleted global oil stockpiles, analysts warn of a coming tipping point after Iran’s leader declared “full-scale war” with the US and Houthi rebels threatened to blockade millions of Saudi Arabian oil passing through the Red Sea.

Luke Yeaman, the CBA’s chief economist, said a total lack of trust between the warring parties made it difficult to judge the trajectory of the conflict, which he said would send a fresh stagflationary pulse through the Australian economy.

“In the current dynamic, we believe this will drag on for at least several weeks and possibly longer,” Yeaman said.

With inflation already tracking too high for comfort, traders in financial markets are upping bets that the Reserve Bank could be forced to hike rates for a fourth time.

Markets now place a nearly 30% chance of an interest rate rise on 12 August, up from 16% two weeks ago. The probability of a hike by November has doubled to 80% over the same period, according to ANZ.

Yeaman said he was sticking to his forecast for no more rate rises this year – at least for now.

“If we see a prolonged closure of the strait and a big jump in oil prices, that will feed through to higher inflation, but it will also slow growth. In the short term that could mean the case for one further rate hike is higher.

“But calls for multiple … rate hikes are a little overblown.”

Yeaman warned that global oil prices could push as high as US$150 a barrel if no negotiated solution was reached by late August or early September, conjuring the spectre of worst-case scenarios contemplated during the first phase of the conflict.

“Our expectation is that before some of those extreme points are reached that there is some resolution. I expect that if oil prices really spiked again then the government would step in and shield households by reinstating the full fuel excise discount.”

Regardless, higher energy prices and renewed global conflict is set to further drag on an Australian economy that is already slowing sharply under the additional weight of three interest rate hikes and a falling housing market.

Yeaman said he had forecast economic growth to slow to 1.5% by the end of this year, from 2.5% in 2025.

“Were you to see a serious escalation in the conflict and a prolonged closure of the strait [of Hormuz], then growth could slow much more sharply.”

Daniel Hynes, a senior commodity strategist at ANZ, said the drop in oil prices during the ceasefire into the low 70s had not reflected the structural hit to global supply and the system’s “fragility”, and that $US80 to $90 a barrel was a more realistic level.

“The $US100-a-barrel mark would potentially be within sight if we are here in a few weeks’ time and things have gotten worse.”

Hynes said there were “technical” limits to how low oil inventories could go without triggering a breakdown of infrastructure, and that these limits were already being breached in the US.

That would push buyers there to look further afield for oil, increasing competition for scarce seaborne cargoes and driving up prices.

“At the moment there’s a feeling that if it [renewed conflict] doesn’t persist too much longer, they will be able to suffer through this period without too much damage,” Hynes said.

“Obviously the risks rise day by day; the market is at a critical juncture.”