Australian fuel market update - 31 July

After a month of good news on fuel prices it appears we are reaching our limit for now. There are two things to watch out for in the near-term, which we describe in this fuel market update:

• Fuel excise will increase by 0.9cpl on Monday 1 August (tomorrow); and
• Fuel prices are now bottoming out, if they haven’t already.

Fuel excise will increase by 0.9cpl on Monday 1 August

The fuel excise levied by the Australian Federal Government undergoes a twice-yearly indexation to CPI. From 1 August,

• Excise for Diesel and Gasoline will increase by 0.9cpl to 23.0cpl; and
• Excise for fuels used in aircraft will remain at 3.556cpl.

The current 22.1cpl discount to the excise, which applies until 28 September 2022 and was announced as a temporary cost of living measure by the previous Federal Government, is still in operation. While this discount is in place, heavy vehicles travelling on public roads will continue to be ineligible to claim back Fuel Tax Credits, and as such will incur the full 0.9cpl tax increase.

Businesses that are currently able to claim back the full excise amount will continue to be able to do so.?

It is unclear from ATO statements whether there will be another indexation increase when the discount is removed on 29 September.?

More information:

• ATO: Excise Rates
• ATO: Fuel Tax Credits Rates

Fuel prices are now bottoming out, if they haven’t already

We saw good news on fuel prices over the last four weeks driven by:

• Oil price (Brent) declines from ~US$120 into the range of ~US$100-$107;
• International shipping cost declines from over “525% of standard rates” to now at 470% (for a 30KT vessel); and
• Significant reduction in refining margins, down from their peak by more than 45% for both Diesel and Jet fuel, and over 85% for Gasoline (petrol).

These movements were primarily due to a softened demand for fuel products, particularly in China with continued lockdowns, and in the US where demand for Gasoline during the summer driving season has been at its lowest rate in over 20 years (excluding the Covid lockdown years).

As a result of these movements, the Mean of Platts Singapore (MOPS) diesel index, which is the price index typically followed by local importers, fell to US$132 (A$191) per barrel last Monday night, its lowest point in US$ since 17 March (see figure 1).?

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

Since Monday, however, the oil market has again tightened slightly and MOPS has closed the week at US$143 (A$204) per barrel.

The same concerns that have plagued the market all year have driven this recent uptick: lack of supply and the risk of supply chain interruption. The major news last week was that Iraq, a member of OPEC+, was struggling to meet its crude oil production quotas due to export bottlenecks in one of its major ports.

On the other side of the equation, demand appears to have been stronger recently despite recession concerns, with US Gasoline demand up 8.5% last week. Additionally, analysts are expecting that a further 700,000 barrels per day of oil will be consumed in Europe following Russia’s decision to cut gas supplies via the NordStream 1 pipeline to 20% of capacity. JP Morgan analysis indicates this may lead to product switching from gas to crude oil over the period October 2022 to March 2023.

As a result of these dynamics, we expect that the recent decline in local fuel prices in Australia will slow down in the short-term, if it hasn’t bottomed out already. What comes next is unclear, but our base case is that prices will start creeping upwards again.

There continues to be a lot of volatility in the fuel market, and unfortunately the only certainty that we have is that the excise rate is going up on Monday.??

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 [email protected] to find out what we can do to support your business.