NAB fears diesel prices will go back above $4 a litre by June quarter under a ‘severe’ worst case scenario

Australian diesel prices are tipped to soar to new record highs above $4 a litre even with fuel taxes halved until the end of June.

Despite US President Donald Trump again hinting at a peace deal with Iran, NAB is less convinced and has modelled a worst-case “severe” scenario where the wholesale price of diesel hit $4 a litre in the second quarter of this year for the first time ever.

That would see motorists conservatively paying $4.30 a litre for diesel to fill up four-wheel drives and trucks, despite fuel taxes being cut by 26.3 cents a litre for three months.

This would have flow-on effects for food inflation considering Australia imports 80 per cent of its fuel and fertiliser.

“Not only is Australia more dependent on diesel imports compared with other comparable countries, it is highly exposed to Middle East supply disruptions,” NAB said.

“While most of Australia’s diesel imports are sourced from Asia, these refineries source most of their crude oil imports from the Middle East.

“Australia refines less than 20 per cent of its annual diesel consumption, while most comparable countries produce more diesel than they consume.”

Last month’s fire at Viva Energy’s Geelong refinery has also reduced diesel refining capacity by 20 per cent.

Such an escalation in wholesale diesel prices to $4 a litre would also mark a doubling of this week’s terminal gate price of $2.08 a litre for diesel in Sydney, with excise tax included in this wholesale figure before a retail margin is added on.

Motorists are now typically paying $2.35 a litre for diesel, following the recent fuel tax relief costing the Budget $2.55 billion in revenue.

Before fuel excise was halved to 26.3 cents a litre on April 1, capital city motorists were typically paying $3.06 a litre for diesel at the end of March, the first full month of the conflict.

Rather than getting better, NAB economists have modelled supply disruptions continuing until the end of the year as Iran damaged energy infrastructure in the Gulf states and continued to blockade the Strait of Hormuz.

Under this “severe” scenario, the terminal gate price of diesel would peak at $4 a litre in the June quarter of 2026 “and remain elevated thereafter”.

Such a surge would see wholesale diesel prices being more than double February’s pre-conflict level of $1.75 a litre and the 2025 average of $1.68 cents a litre.

In the most optimistic “baseline” scenario, wholesale diesel prices would average $2.55 a litre by the June quarter “before easing as transit through the Strait of Hormuz gradually resumed”.

By the end of 2026, this terminal gate price would fall to $2 a litre and ease further to $1.85 a litre by the September quarter of 2027, based on falling Brent crude oil prices, now at $US102 a barrel.

“However, the lack of progress towards a resolution in the crisis over recent weeks means prices are tracking closer to the adverse scenario than the baseline,” NAB said.

The most likely “adverse” scenario has wholesale diesel prices peaking at $3.15 a litre by the June quarter “as shipping resumes and supply volumes normalise relatively quickly”.

Australia is also more vulnerable to a fertiliser shortage, following the 2023 closure of Incitec Pivot’s Gibson Island urea plant at Gibson Island in Brisbane.

“Australia is more exposed to disruptions to Middle Eastern fuel and fertiliser supply than other large grain-producing countries, owing to its reliance on imports from the region,” NAB said.

“Rationing of fertiliser use, reduced cropping, and substitution could cause agricultural output prices to rise in the medium term.”

Australia now imports 80 per cent of nitrogen-based fertiliser compared with 60 per cent in Argentina, 50 per cent in the European Union and just 20 per cent in Canada and the US, NAB noted.

The situation unlikely to improve until 2027 when urea is produced at Karratha in Western Australia’s Pilbara region by Perdaman Chemicals and Fertilisers.

The Commonwealth Bank rates a re-escalation of the Middle East conflict as a 40 per cent chance, compared with 50 per cent for a de-escalation and 10 per cent for a prolonged stalemate.

“US efforts to increase bargaining leverage through economic pressure on Iran have so far failed to secure Iranian concessions,” senior geo-economics analyst Madison Cartwright said.

“As the US and Iran seek to increase their leverage within the confines of the ceasefire, they risk crossing red lines that could lead to renewed escalation.”