Big banks bet on a rate hike

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Matt Bevan (0:08)

If I had to pick one word to describe America's history in the Middle East, I'd probably go with mistake.

Michael Janda (0:13)

But it was, the Americans believe, all a dreadful mistake.

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Obviously, the war in Iraq was a big, fat mistake.

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Most Americans actually think this war is a mistake.

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I'm Matt Bevan, and on my show, if you're listening, we actually try to learn from the world's mistakes. Learning from history, I mean, who could imagine?

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Carrington Clarke (0:38)

The price of Brent Crude has climbed back above $100 a barrel, in response to rising concerns that the ongoing conflict in the Middle East is starting to spread. Meanwhile, here in Australia, the coalition is touting a new fuel excise proposal, as the price of diesel climbs closer to spikes, not seen since the beginning of the conflict. An analyst is saying a September rate hike from the Reserve Bank is looking increasingly likely. And what do the latest auction clearance rates tell us about this latest chapter of the Australian property story, and just how deep a downturn is on the horizon? Welcome to ABC Business Daily.

I'm Carrington Clarke.

Michael Janda (1:21)

And I'm the ABC's Business Editor, Michael Janda.

Carrington Clarke (1:23)

Michael, thank you for joining me. There's a lot on this week. Let's start with the kind of big macro picture of what's happening in the global economy.

We have once again seen oil prices spiking, and it's mainly about what's actually happening into the Southeast of Saudi Arabia, further away from Iran, but this is about the Houthis in Yemen, taking on the government backed by Saudi Arabia. Now there has been a long time tension.

Michael Janda (1:51)

Yeah, a lengthy conflict there.

Carrington Clarke (1:52)

It's a long term conflict, Saudi Arabia backing, what it recognizes the government of Yemen. The Houthis don't recognize that government, and they have now, the Houthis have basically taken control of the entire Red Sea coastline of Yemen. That means they're able to exert power over the strait there that connects the Red Sea out into the Indian Ocean.

Michael Janda (2:17)

You got a couple of problems. You've got the Bab-el-Mandeb Strait that you were referring to for all the shipping going south from Saudi out into the Indian Ocean, and from there across to Asia, which is of course the big demand area for Middle Eastern oil and refined product.

Then also you've got the ability of the Houthis to attack Saudi oil infrastructure on that West Coast to actually prevent the export in the first place. Of course, we've heard those reports about attacks coming even from Iraq potentially to the East-West pipeline, which was causing another disruption.

Carrington Clarke (2:54)

It looks like the Houthis are also hitting other targets within Saudi Arabia proper.

We're not sure exactly what they're targeting, except we believe that they are so-called sensitive sites. It's hard to differentiate between the conflicts in the Middle East. This is not in many ways directly about what's happening in Iran and the ongoing war between the US and Iran and also Israel is obviously involved in that. But the Houthis are backed by Iran. Obviously, there's a long-standing regional rivalry between Saudi Arabia and Iran. And it remains unclear exactly how much help Saudi Arabia potentially needs to deal with the Houthis threat. But what this means from an economic perspective is that we not only now have a curtailing of the energy flows going through the Strait of Hormuz.

Now, we're seeing the interruption through the Red Sea out into the world, both up through the Suez, but also through the Strait down into the Indian Ocean. And this is part of the reason why people are now so scared that oil ain't coming down below $100 anytime soon, potentially. Is that right?

Michael Janda (3:57)

Yeah. Look, huge fears and huge uncertainty. And the greater the uncertainty, the higher those futures prices. Because the Brent oil price, we tend to talk about that $103 a barrel price. That is a one-month futures contract for Brent oil, one-month delivery. So people are pricing in the prospect, and we have seen gaps between some of the different futures pricing. And when you actually look at oil for delivery now, often that's been higher during the conflict because there have been actual shortages. And then we can even move beyond that to refine fuel prices because we've seen further action from the Ukrainians in Russia with a big refinery in Moscow, again hit in this massive drone attack, huge disruptions to diesel supplies. So not getting diesel coming out of Russia for the rest of the world because they're having to ration the supplies that they've still been able to refine for Russian use. And of course, they've got the war in Ukraine going on that they need to supply diesel to their forces there, as well as domestic demands.