Oil prices to hit $US100 a barrel within days, says Saul Kavonic | The Business | ABC NEWS

[00:00:00]Oil is going to be inching higher uh with time here because we're living on the oil market credit card. We're drawing on stocks ultimately there's we're already at record low stocks that's [music] going to max out in the next couple of months.

[00:00:19]>> So Kavanick, welcome to the program.

[00:00:21]>> Always a pleasure. So, when this conflict in the Middle East first began at the end of February, beginning of March, experts were calling it bigger than the energy shock of the 1970s, are we now looking at an energy shock 2.0?

[00:00:37]>> Indeed. Or perhaps it's 1.5 because this is a continuation of the same conflict that began in March. So, we've been on a roller coaster since then. We saw prices spike in March, April, but then in the wake of the ceasefire, prices really started to plummet back down again and of course that's all turned around in the last week now that the conflict is back on an escalatory pathway. And in particular, the concern now is twofold.

[00:01:04]First of all, not only is the straits the volumes going through the straight of largely closing down again, but we now have over a billion barrels of less oil and fuel stocks, which we've used up over the last few months. And at the same time, we're now seeing more active threats over the last 24 hours towards passage through the Red Sea as well. And the Red Sea accounts for about 5 million barrels a day or 5% of the global oil supply and is the main route to get oil out of the Gulf which bypasses the strait and now that's been put under threat too. And so you're seeing oil prices continue to rise high almost day in day out uh over the last week. That said, we must caution that the market is still pricing in that this conflict is still going to be contained in some way.

[00:01:55]We are not near the high prices we saw back in March and April. And that's because there still seems to be an intent, at least so far, on both sides, to contain this conflict, to not allow it to go to the allout kind of levels that we saw earlier on in the year.

[00:02:12]>> And I mean, you mentioned the Red Sea and it's Yemen's Houthi rebels that are trying to block that passage. I mean, can they really be that successful?

[00:02:22]Well, it is premature to say that the Red Sea route is closed the same way the Straight of Hormuz is. Uh there's a few elements here. First of all, the Houthi's military capability to threaten the strait is much less than Iran's is with the Strait of Hummus. And secondly, it's not exactly clear what the Houthi's agenda is here. What we have seen in past months is they might be angry for concessions including monetary concessions from the Saudis and others uh rather than necessarily having an existential fight to the end which is what that we're seeing with the Iranian regime. But the fact that we've already seen an attack on a Saudi tanker, some of the tankers have turned around in the last day, that's already starting to provide additional pressure on oil markets or at least the perception of pressure on top of the shortages that are now becoming more acute because the straight of Humur's volumes have really collapsed by about 2/3 over the last week, which was already from flows, which had collapsed 2/3 from pre-wall levels.

[00:03:25]So crude prices went above $120 US a barrel when we're looking at Brent in April. Where do you think it could go from here? We're already at around 95 96 US a barrel.

[00:03:38]>> Look, absent an deescalatory pathway for the conflict, which doesn't look very likely in the immediate term, oil is going to be inching higher uh with time here because we're living on the oil market credit card. We're drawing on stocks. Ultimately, there's we're already at record low stocks. That's going to max out in the next couple of months. And so, I think we're going to see oil head above $100 the next few days. Um, and it's likely to continue to inch higher until we see some kind of resolution one way or another in the region. And if we see the conflict escalate significantly uh which could include for example Israel directly entering the conflict attacks on oil infrastructure in the region or more sustained attacks on Red Sea passage then oil could retest the highs we saw back in March.

[00:04:29]>> You mentioned oil reserves and obviously refining capacity is also an issue. I mean is Australia at risk of rationing?

[00:04:40]So Australia has faced a risk here all along. We've fared relatively better so far uh both because of government's diplomatic efforts with our trade partners and their underwriting package and ultimately Australia as a relatively wealthier economy. We've had the ability to pay more to keep the fuel coming. We must remember some of our neighbors in Asia have already had rationing or demand destruction in and had to go without which has freed up volumes for to keep coming to Australia. Now the risk is is as this situation goes on if it continues in its current form or escalates further then the amount of shortages are going to build the amount of demand that has to be destroyed around the world is going to have to grow about threefold from what it is currently and that's going to put more pressure on Australia. So we are nowhere near out of the woods yet. And the longer this goes on the higher the risk is that we'll face shortages at home and at a minimum we're going to face higher prices if not shortages.

[00:05:42]Well, on another issue, Australian gas exporters have been reaping windfall profits really as a result of this Middle East conflict. There are calls for a new gas exports tax, but the government's ruling it out for now.

[00:05:56]What's your view? Well, there's a very clear and stark reason that the government is ruling out a gas tax now and is actively trying to downplay that debate and that's because they have as part of their negotiations with our trade partners to keep the fuel coming to Australia during these shortages.

[00:06:14]They've agreed with them that we will not be slapping a tax on the gas that goes to them. And so there's a quid proquo here. Those understandings have been reached with our core trading partners and it's not in Australia's interest or certainly the government's interest to reneg and betray our trading partners at a time when we need the fuel that comes from them very urgently.

[00:06:33]>> So Kavvenick, thank you so much.

[00:06:36]anytime.