Oil Fell US$18 in Ten Days on Iran Peace Hopes. Diesel Will Be Last

On Monday 26 October, Brent crude hit US$117.35 a barrel, its highest in about six months. By early this morning, Australian time, it was trading below US$99. Most of that fall came this week, on talk of a deal to end the war with Iran.

So when does the servo down the road catch up? Not this week. And if you drive a diesel, expect to wait longest of all.

A week of whiplash

The slide started on Monday, US time. Brent fell 7.6 per cent to US$104.77, its biggest one day drop in dollar terms since April, according to CNBC. Iran's foreign ministry had said it could reopen the Strait of Hormuz within two days if the United States lifted its naval blockade and met its other demands, with Qatar mediating.

Tuesday showed how fragile all this is. US officials told The Wall Street Journal that American forces had struck Iran's Qeshm Island on Monday. Brent still slipped another US$1.17 to US$103.60. Then, after the US midterm elections, President Trump played down the prospect of further strikes, Bloomberg reported, and overnight Brent fell through US$100.

The share market answered quickly. On Melbourne Cup day, Viva Energy shares fell 6.6 per cent to A$2.70 and Ampol dropped about 5 per cent. Both run refineries, at Geelong and Lytton, and analysts say a peace deal could squeeze the refining margins that have swollen their earnings this year. We broke those margins down in our look at where your petrol dollar goes.

Here's what's really going on

Brent is a crude price. Australian petrol is priced off Singapore's benchmark for 95 octane. Between the two sit refining margins, shipping, insurance and a pricing formula that runs on averages, and each moves on its own clock.

Start with the arithmetic. A barrel holds 159 litres, so US$18 off a barrel is about 11 US cents a litre. Convert that to Australian dollars, add GST, and on paper it's worth something in the order of 16 to 19 cents a litre. Treat that as a ceiling, since it assumes nothing else in the chain gets dearer.

Then there's the delay. Terminal gate prices, what a servo pays to fill its tanker, are set from a rolling average of Singapore prices. The Australian Institute of Petroleum (AIP) says that builds in a lag of one to two weeks, whichever way prices are heading. Right now the lag is still delivering October's rise. Sydney's average wholesale unleaded climbed every weekday last week, from 222.0 to 226.5 cents a litre, the AIP says, and the NRMA expects regular unleaded in Sydney to hover in the mid 230s this week.

In a nutshell, this week's crude fall is a story for the second half of November, and only if it sticks.

We've seen this film before. Twice

On 17 January 1991, within a day of the air war on Iraq beginning, oil had what was then the biggest one day fall on record. US crude dropped by about a third, from around US$32 to under US$22, according to reports at the time, and Brent closed at US$20.75. Forecasters had tipped US$50 the moment fighting started. The International Energy Agency had just activated an emergency plan to release 2.5 million barrels a day from stockpiles, and the market was already oversupplied.

The second ending is fresher. On 8 April this year, a two week ceasefire between the US and Iran knocked up to 17 per cent off Brent, taking it to near US$95, the NRMA noted at the time. The talks didn't produce a deal. US warships began blockading the strait on 13 April, crude went back above US$100, and Brent peaked at US$118.03 on 29 April.

Which one is this? Nobody knows yet. Iran's Foreign Ministry has said Tehran won't accept diplomacy based on coercion, and the UK Maritime Trade Operations centre logged at least four attacks on ships in the region in the first days of November.

Why diesel will be last

Petrol has one big problem. Diesel has at least three, and a deal with Iran only fixes one of them.

Kevin Morrison of the Institute for Energy Economics and Financial Analysis told ABC News Breakfast this week that Singapore diesel was still trading around US$165 a barrel, about US$70 above crude. He counts three conflicts squeezing supply: the Iran war, Houthi attacks on Saudi oil infrastructure, and Ukrainian strikes on Russian refineries.

Russia was the world's second biggest diesel exporter before the drones started finding its refineries. Moscow imposed a diesel export ban on 8 July, and the IEA estimates Russian diesel output is down nearly 30 per cent on last year. Combined diesel exports from the Middle East and Russia fell to 520,000 barrels a day in August, 75 per cent below a year earlier, according to the IEA.

Then there's Saudi Arabia's 1,200 kilometre East West pipeline, which carries crude across the country to Yanbu on the Red Sea. With Hormuz shut, it has been the kingdom's main way out, and Yanbu exports averaged more than 4 million barrels a day in June and early July, according to the Foundation for Defense of Democracies. A September attack knocked out several pumping stations for about two weeks, trade press reported, and in late October the Houthis claimed fresh strikes on the line and on Yanbu itself. Saudi Arabia hadn't confirmed the pipeline attacks.

Even the ships cost more. The IEA said in October that freight for a supertanker carrying crude from the Gulf to Asia had reached around US$36 a barrel, more than five times the cost before the war. Asian refineries make most of the fuel Australia imports, and shipowners and insurers will want to see a deal hold before they price that risk back down.

The IEA expects the global diesel market to stay tight well into 2027, and notes that the 2022 squeeze eased largely because China ramped up exports. It thinks a repeat is less likely this time.

Australia imports around 90 per cent of its diesel, so we wear that bill in full. On Petrolmate's data, the 3,801 servos that reported diesel prices through the state and territory government fuel schemes in the past 48 hours have a median of 279.9 cents a litre. Unleaded sits at 238.5 across 5,612 servos. That 41.4 cent gap is about $25 on a 60 litre fill, and it's the part of your fuel bill least likely to shrink in a hurry.

What it means at the bowser

In the five capitals with regular price cycles, Sydney, Melbourne, Brisbane, Adelaide and Perth, wholesale falls usually show up first in the discounting phase of the cycle. Adelaide's average already fell 4.5 cents to 227.9 last week, the AIP says. If Brent holds below US$100 for a fortnight or so, expect the troughs elsewhere to start getting deeper. Our guide to the best time to fill up explains how to catch them.

Regional drivers should expect a slower trickle. The AIP's national regional unleaded average was 241.7 cents last week, 6.4 cents above the metropolitan average, and regional Northern Territory averaged 287.3. In Darwin, the NT 24 hour price lock means servos lodge their next price a day ahead, so you can usually see a change coming.

And if the talks collapse, as they did in April, the rise will come through the same pipes at the same speed.

The things worth remembering

If this week's talks turn into a real deal, petrol will feel it first and diesel last, and the gap between the two will show how much of this year's squeeze was ever about Iran. Keep an eye on this space.