Australia’s oil vulnerability is back in focus as crude surges above $US90

Oil has surged back above $US90 a barrel as renewed fighting between the United States and Iran revives a question that has stalked energy markets for months: how much longer can the world absorb disrupted Middle East supplies before inventories, refining constraints and higher prices begin to bite?

Brent crude settled at $US94.65 a barrel on Tuesday, September 1, up 4.6 per cent, while West Texas Intermediate jumped 5.2 per cent to $US90.22. The gains took crude to five-week highs and followed renewed US strikes against Iranian targets and fresh concerns about commercial shipping through the Strait of Hormuz.

The move is particularly striking because oil had been heading in the other direction only days earlier. On August 28, Brent settled at $US89.31 and WTI at $US83.40 as traders responded to reports of possible progress towards reopening the Strait.

Josh Young, founder and chief investment officer of energy investment firm Bison Interests, argues the latest rally is less about the US strikes themselves than a market beginning to recognise how much oil has been removed from normal global supply.

Speaking on The David Lin Show this week, Young said the risk surrounding Iran and the Strait had been central to his bullish view on oil for several years.

“This supply risk from Iran from the Strait of Hormuz is significant and no one knows how long it will go,” Young said.

His argument starts with the volume of oil historically moving through one of the world’s most important energy corridors.

Young said debate over whether current flows through Hormuz amounted to five, seven or 10 million barrels a day missed the more important comparison.

“There were 20 million barrels a day coming through the Strait of Hormuz in February,” he said.

That matters because the market is dealing with flows rather than simply whether the Strait can technically be described as open or closed. Tankers continue to move, but considerably less oil is reaching world markets through the normal Gulf routes.

Young believes another development has changed the calculation for shipping companies. He said recent attacks appeared to have caused more serious damage to tankers than some earlier drone attacks, potentially increasing the risks faced by shipowners, crews and insurers.

“The severity of the damage matters a lot because that impacts the ability for the shipping companies to just sort of close their eyes and, you know, accept really expensive insurance and accept the risk to their sailors’ lives,” he said.

That interpretation needs some caution because Young himself acknowledged he was relying on reports rather than privileged information about the attacks.

But the broader supply disruption is measurable. Reuters reported this week that Iranian crude loadings have collapsed from about two million barrels a day in March to roughly 220,000 to 255,000 barrels a day in August as the blockade restricts Iran’s ability to move crude through Hormuz.

Josh Young argues markets are concentrating too heavily on tanker traffic through Hormuz when attacks on Saudi, Kuwaiti or other Gulf energy infrastructure could potentially remove additional production

Young’s concern extends beyond Iran itself. He argues markets are concentrating too heavily on tanker traffic through Hormuz when attacks on Saudi, Kuwaiti or other Gulf energy infrastructure could potentially remove additional production.

“If you’re under supplying the world by 5 million barrels a day or under supplying the world by 9 million barrels a day, you’re still, that’s a huge amount of a commodity,” Young said.

“Even under supplying by a million barrels a day is a huge deal and historically has led to enormous moves higher.”

There is disagreement over the extent of that shortage. A Reuters survey of 31 economists and analysts published on Monday produced considerably more restrained expectations, forecasting Brent to average $US85.08 during 2026 and WTI $US80.20. Analysts cited Middle East shipping disruption as an upside risk, but weaker Chinese demand as a constraint on prices.

I think China wants oil prices higher. We’ve seen Chinese refiners and other Asian refiners start to buy more oil. I think they’re worried about what you mentioned about running out of oil and so they’ve been buying more of it than they were

Young sees China differently over the next three months.

“I think China wants oil prices higher,” he said, pointing to renewed purchases by Chinese and other Asian refiners as inventories decline.

“We’ve seen Chinese refiners and other Asian refiners start to buy more oil. I think they’re worried about what you mentioned about running out of oil and so they’ve been buying more of it than they were. Even as prices are rising, they’ve been buyers less price sensitive than people expected.”

His three-month call is therefore straightforward: “I think unfortunately we’re set higher.”

The reasoning goes beyond geopolitics. Young points to reduced drilling activity in the Middle East, declining inventories and the possibility that production cannot simply be switched back on at previous levels after prolonged disruption.

“The longer this goes, the more risk there is that international storage levels are depleted,” he said.

When producers eventually try to restore output, Young said, “they may actually not be able to produce as much as people are thinking”.

That inventory cushion has already become thinner. The IMF warned in July that large reserves which helped the global economy withstand the initial oil shock had been substantially drawn down.

There is another complication: refining.

Crude oil and the petrol, diesel and jet fuel ultimately purchased by consumers are separate markets. Young argues unusually high refining margins could narrow over coming months if refiners increase utilisation during the northern hemisphere’s normally quieter shoulder season.

That could produce the counterintuitive outcome of crude rising sharply without an equivalent increase in petrol prices.

“You could actually see oil prices go up, let’s say $30 a barrel and have no more demand destruction than you’re already seeing,” Young said.

Josh put numbers around the possibility, saying the refining adjustment could allow “110 WTI or 120 even versus today” without necessarily producing another comparable increase in petrol or diesel prices.

That is a bullish scenario rather than a consensus forecast. At current prices, another $US30 increase would put WTI near $US120.

Technical indicators are also pointing to considerable volatility rather than a one-way market. Reuters analysis this week identified around $US94.83 for Brent as an important level which, if broken, could open a move towards July’s peak around $US102. A reversal below $US85.41 could instead expose considerably lower prices.

For Australia, the national average price of regular unleaded petrol was about 205.9 cents a litre on September 1, according to FuelRadar, although prices varied widely between locations. Another live Australian fuel tracker put national diesel at about 253.9 cents a litre. The different methodologies mean the figures should be treated as market snapshots rather than directly comparable official averages.

Australia is particularly exposed because it imports about 90 per cent of its oil requirements. Geoscience Australia says the country is a relatively small oil producer and its conventional crude resources are declining faster than discoveries are replacing them. Australia’s proven and probable crude oil reserves were estimated at 229 million barrels using 2023 data, equivalent to about seven years of domestic crude production at that year’s production rate. More than 94 per cent of Australian crude, condensate and LPG production was exported in 2022-23 because the grades produced locally do not necessarily match domestic refinery requirements.

That is different from the amount of usable fuel actually sitting in Australian storage.

The latest published government Minimum Stockholding Obligation figures show industry held stocks equivalent to an average 44 days of petrol consumption, 36 days of diesel and 31 days of jet fuel during the June quarter. Actual volumes exceeded the minimum obligation across all three categories.

Energy Minister Chris Bowen said in early July that Australia then had about 6.2 billion litres of fuel physically in the country, as well as fuel already contracted and travelling to Australia.

Diesel may consequently matter more to Australian inflation than petrol. Higher diesel costs work their way through trucking, agriculture, mining and distribution and eventually into the prices of food and other goods

The distinction is important. Australia’s underground oil reserves do little to protect motorists from an immediate disruption to Asian refineries, shipping routes or refined fuel supplies. Australia buys much of its finished fuel from Asian refineries, many of which depend heavily on Middle Eastern crude.

Diesel may consequently matter more to Australian inflation than petrol. Higher diesel costs work their way through trucking, agriculture, mining and distribution and eventually into the prices of food and other goods. Earlier this year Australian energy analysts warned that diesel shortages could have a larger inflationary effect than higher petrol prices alone.

Young makes essentially the same argument globally.

“Diesel prices are really high and that’s going to force inflation into the goods economy,” he said.

For Australia, that creates a second-order risk. A renewed oil shock could lift transport and goods inflation just as central banks are trying to contain price pressures. It would not automatically determine the Reserve Bank’s next move, but persistent fuel-driven inflation would complicate the interest-rate outlook.

The oil market is therefore entering the next three months with two competing forces. Demand weakness and the prospect of eventual supply normalisation argue against extrapolating the latest rally indefinitely. Young’s case is that the market has spent months concentrating on those bearish possibilities while inventories and physical supply have quietly deteriorated.

His warning is that the price itself may have disguised what was happening underneath.

“Prices can move around a lot in the short term, disconnected from reality,” Young said.

If he is right, the latest move above $US90 may be less the end of an oil rally than the market beginning to price the shortage he believes was there all along.