Relief for businesses, top bank with oil ready to flow
The ceasefire between the US and Iran has provided a much-needed reprieve for Australian businesses and the Reserve Bank.
Oil prices fell nearly 15 percent to $95 a barrel after President Donald Trump announced Wednesday that the United States would pause hostilities for two weeks while permanent peace talks continue.
Iran’s confirmation that it would allow shipping through the Strait of Hormuz during the same period raised hopes for normalization in fuel supply and a respite in inflation.
Ben Udy, chief economist at Oxford Economics Australia, said although the prospect of a long-term solution remained uncertain, keeping the Strait open for even two weeks allowed accumulated oil to pass and supply chains to recover.
“This will enable the oil gap we see in the global economy to begin to close and help many of the supply chains recover, at least in the near term,” he told AAP.
Risk-on sentiment sent equity markets sharply higher following the deal. Australia’s ASX200 index closed up 2.6 percent.
But Mr. Udy said volatility was likely to increase in markets over the next two weeks as investors scrutinized additional information that came to light about a potential long-term deal.
“Whatever happens in two weeks’ time, today’s developments make it easier for businesses to continue operating in Australia,” he said.
“With the help of a little foresight, companies can probably be a little better prepared for possible future disruptions in the Bosphorus.”
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said it was important for Australia to use the two-week delay to replenish fuel stocks and increase resilience.
“The news of a two-week ceasefire provides some relief as it provides significant breathing space and the opportunity to progress work on improving fuel security,” he said.
“But the risks have not gone away. Businesses continue to be exposed to global supply shocks and Australia cannot assume that disruption to conflict will continue.”
The benchmark oil price remained well above the pre-war level of about US$70 per barrel.
Commonwealth Bank commodity analyst Vivek Dhar said there was a risk that a comprehensive agreement would not materialize and energy prices would remain high for a long time.
“Iran’s control of the key waterway provides a means for war reparations through tolling and deters the United States and Israel from attacking Iran again,” he wrote in a research note.
However, Israel and other countries in the Persian Gulf will be extremely uncomfortable with such a concession.
“So, while oil and LNG prices may fall significantly, there is still room for a significant geopolitical premium to solidify in the foreseeable future based on the details of the comprehensive agreement.”
Mr Udy expected the Central Bank to raise interest rates in May, although the reopening of the Bosphorus would give the bank some more breathing room.
“The current increase in fuel prices will put pressure on inflation in both March and April,” he said.
“Other parts of the supply chain affected – such as fertilizer impacting food prices, helium exports impacting (computer) chips – will have long-lasting impacts on supply chains.”
News of the ceasefire could bolster consumer confidence, which has rebounded from record lows last week as motorists experienced temporary relief from rising fuel prices.
According to the ANZ-Roy Morgan consumer confidence index, household confidence rose 3.5 points to 62.3 in the week leading up to Easter; This coincided with the government’s decision to reduce fuel duty.
“All sub-indexes have strengthened and inflation expectations have eased slightly,” ANZ economist Sophia Angala said.
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