The United States and Iran have ended a recent fragile peace agreement with an exchange of missile fire, reigniting concerns over the flow of oil and gas through the strategic Strait of Hormuz. This development, coupled with ongoing disruptions to Russian diesel exports, is expected to tighten global fuel supplies and potentially increase prices for consumers.

The resumption of hostilities centers on control of shipping through the Strait of Hormuz, a vital waterway. Iran has reportedly fired missiles at vessels navigating the strait, leading to the U.S. proposing a 20% fee on the value of cargo for ships passing through. Such a fee, if implemented, would likely be passed on to consumers, impacting the cost of oil and other goods.

This conflict comes as the market is already facing a shortage of diesel. Ukraine's drone attacks on Russian refineries have forced Russia to halt its diesel exports, causing prices for the fuel to soar. Australia, as the world's largest importer of diesel, faces significant implications as this fuel is critical for its long-haul freight, mining, and agricultural sectors.

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Historically, a closed strait and a dearth of Russian diesel have triggered significant price volatility. In early April, benchmark diesel prices in Asia reached a record level of over $232 a barrel, more than double the global oil price at the time. The current situation, with Singapore Gasoil up almost 6% on Tuesday, indicates a similar trend may be developing.

Australia's reliance on imported diesel, with about 80% of its oil product consumption coming from abroad due to the closure of nearly three-quarters of its refining capacity over the past two decades, makes it particularly vulnerable. While Australia has sanctions on Russian energy, other nations like Turkey, China, Brazil, and Singapore, which are buyers of Russian oil products, will now compete with Australia for diesel in a tightened market.

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Adding to the supply concerns, U.S. strategic oil reserves are at their lowest levels since 1983. Previous contributions to the International Energy Agency's stock releases have depleted these reserves, removing a significant buffer against supply disruptions.

Australia currently maintains oil stockpiles equivalent to 50 days of net imports, which is below the 90-day level recommended for International Energy Agency members. While official data shows a decrease in petrol, jet fuel, and diesel consumption in April compared to the previous year, the prolonged closure of the Strait of Hormuz and the absence of Russian diesel exports could lead to increased prices at the pump.

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Experts suggest that both Iran and the U.S. may be constrained in maintaining a prolonged conflict due to economic pressures and upcoming elections. Iran's economy is weakened by declining oil exports, while both the U.S. and Israel face significant elections before the end of the year, which could alter their foreign policy approaches.

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