Material Matters: Oil, Gas And Nickel

Commodities | 10:00 AM

Oil prices and the US summer driving season; falling Australian East Coast gas prices; Indonesia's influence on nickel prices.

• Reopening of the Strait soon to become critical
• US summer driving season to limit US oil exports
• Falling demand for Australian East Coast gas
• Indonesian policy to create nickel price uncertainty

By Greg Peel

Global Oil

Oxford Economics’ baseline assumption is that a deal is reached by the end of July to restart transit through the Strait of Hormuz.

Given Donald Trump’s constant on again, off again approach to the art of the deal, ongoing exchanges of fire during a supposed ceasefire, and Iran’s clear leverage over the US when it comes to the Strait, one would be forgiven for thinking Oxford Economics is being optimistic.

But Oxford’s assumption suggests end-July is crunch time as rapid inventory drawdowns increase pressure to restore shipping before stocks reach critical levels.

If the US or Iran’s stance leads to a more prolonged closure of the Strait, OECD stocks could reach a critical threshold by mid-September, Oxford warns, triggering a price spike towards US$150 per barrel.

Prices at this level would be difficult to tolerate for long, creating overwhelming pressure on both the US and Iran to allow traffic through the Strait to resume.

The exact timeline nevertheless remains contingent on several factors. Further demand destruction, additional non-Gulf supply, or larger US and Chinese inventory drawdowns could reduce the pull on global stocks and extend the critical timeline, while a slower adjustment would bring the critical point forward.

So far, the market has adjusted better than Oxford expected, with weaker demand, trade flow shifts, and inventory drawdowns preventing major shortages. But these buffers are finite, and stocks do not need to reach zero, the economists warn, before governments, refiners, and traders become concerned about fuel availability.

One influential factor in global demand is the annual US summer driving season, now commenced.

US Oil

America is defined by baseball, apple pie and summer holiday road trips. So influential is the propensity for Americans to hit the road in summer, the “US summer driving season” has long been singled out as a significant factor in global oil price forecasting.

This time last year the Nymex oil price was trading under US$70/bbl, and fell to as low as US$55/bbl by December. Today the price is fluctuating from below US$100/bbl (deal on again) to above US$100/bbl (deal off again).

One might assume a “staycation” might be preferential for Americans this summer given the burden of high prices of everything, and particularly “gas”. But ANZ Bank analysts point out history suggests US oil demand is relatively inelastic.

A 10% rise in the oil price leads, on average, to only a -0.3%-0.8% fall in demand. In 2022, when Russia invaded Ukraine and oil prices hit US$140/bbl and gasoline exceeded US$5/gallon (currently around US$4.50/gallon), there was only mild demand destruction.

Experts agree current oil prices are high, but not as high as had been feared. ANZ notes part of the reason the oil market has held up relatively well, despite the huge supply losses driven by the Middle East conflict, is the ability of the US to ramp up exports of crude oil and refined fuels.

That buffer may nevertheless be on borrowed time as the US driving season arrives.

US exports of petroleum products surged following the closure of the Strait of Hormuz and the subsequent disruption of -15m barrels per day of oil. Crude exports reached 5.6mb/d, up from 4.4mb/d over the past year.

Yet, despite the current administration’s energy policy (drill baby, drill), ANZ points out most of these additional barrels have come from inventories rather than new supply.

US commercial crude oil inventories have fallen -21mbbl over the past four weeks. In addition, the US Strategic Petroleum Reserve has been drawn down by -41mbbl since the International Energy Agency announced its coordinated -400mbbl stockpile release plan.

Meanwhile, US crude oil production has remained stagnant, ANZ notes, averaging 13.65mb/d in the first four months of the year.

As warmer weather and school vacations lead to the highest traffic volumes of the year, US refiners may well compete harder for barrels that have to date been heading to the US Gulf Coast for export.

This could see US exports weaken during the peak driving season (July–August) as they become the adjustment margin, ANZ warns, initially driven by price dynamics but potentially through policy dynamics [America first] if gasoline stocks tighten further.

East Coast Gas

Speaking of “America first”, the Albanese government has moved to put Australia first with regard the country’s significant LNG export industry.

The government's recently released Domestic Gas Reservation Scheme (DGRS), designed to quarantine gas for domestic consumption at more affordable pricing, has left more questions than answers, Jarden suggests, and even when answers emerge, the fact key settings for the Domestic Supply Obligation can be adjusted every year will add uncertainty around future gas prices and complicate the approval of new supply projects.

Local gas producers are already facing declining demand due to the emerging impact of large-scale batteries, Jarden notes, and flat near-term supply has depressed spot gas prices in 2026 year to date.

Australian gas demand declined by -2.7% in 2025, primarily due to lower gas-powered generation (GPG) demand. East coast gas demand has now declined by -32% since its 2012 peak, primarily due to lower residential demand (efficiency measures and incentives to switch to electricity) and industrial demand (closures and conversions from GPG).

Jarden forecasts 2026 demand -3.8% below that of 2025 levels, primarily due to lower demand. In 2026 year to date, GPG demand is down -28% versus the same period last year.

Jarden attributes the bulk of the decline to large-scale batteries taking a greater slice of the evening peak demand pie.

Meanwhile, with regard supply, output is resilient and storage is full.

Looking ahead, Jarden sees less risk of supply shortfalls over the next five years compared to prior analysis, primarily due to increased forecast Victorian storage and South West Queensland pipeline (connecting Queensland and South Australia) capacity.

Jarden thus believes long-threatened LNG import terminals may not be needed until the 2030s, highlighting the relative abundance of southern Australian gas supply.

One conclusion drawn is that low gas demand (either GPG or from Queensland LNG), the lack of any supply from Queensland LNG gas at higher prices and full gas storage facilities have combined to depress gas prices.

Gas producers will be hoping for an uptick in GPG demand and cooler weather conditions in Victoria and South Australia over the coming winter months to drive demand and prices higher.

Furthermore, the aforementioned Domestic Supply Obligation set by the government under the DGRS is designed to generate a small over-supply into the domestic market to keep a lid on gas prices.

But Jarden warns the level of flexibility available in setting project-level DSOs will make it difficult for new gas developments to proceed in the face of future price and demand uncertainty.

Western Australian LNG projects should be exempt from the DGRS as the state has its own gas reservation scheme which, Jarden points out, is more onerous from a reserve commitment perspective.

Regarding stock sensitivity to a potential reduction in domestic gas prices, Jarden suggests Amplitude Energy ((AEL)) is the most sensitive to price movement in the broker’s coverage universe, followed by Beach Energy ((BPT)) and Origin Energy ((ORG)).

Unsurprisingly, Santos ((STO)) and Woodside Energy ((WDS)) are least impacted, with Santos’ impact likely to be felt in the 2030s (from the Cooper Basin and GLNG), although it may also impact Narrabri and Beetaloo progress.

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